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Operator: Ladies and gentlemen, welcome, and thank you for joining Eurofins 2025 Full Year Results. Please note that this call is being recorded and will be -- will later be available for replay on the Eurofins Investor Relations website. [Operator Instructions] During this call, Eurofins management may make forward-looking statements, including, but not limited to, statements with respect to outlook and the related assumptions. Management will also discuss alternative performance measures such as organic growth and EBITDA, which are defined in the footnotes of our press releases. Actual results may differ materially from objectives discussed. Risks and uncertainties that may affect Eurofins' future results include, but are not limited to, those described in the Risk Factors section of the most recent Eurofins' annual and half year reports. Please also read the disclaimer on Page 2 of this presentation, subject to which this call and Q&A session are made. I would now like to turn the conference over to Dr. Gilles Martin, Eurofins' CEO. Please go ahead. Gilles Martin: Thank you, Andrew, and hello, everybody, and thank you for joining our full year 2025 results call. I will keep -- we have a long slide show, but I will not go through every slide. I have to give apologies for Laurent Lebras, our CFO, who is not well today. So I will not go in great detail through the financial slide and leave time for questions. If I start on Page 5, or the Slide 2. I'm happy to report on a strong year 2025, where we achieved all our objectives or exceeded [Technical Difficulty] Eurofins, as you know, is every 5 years defining a plan for the next 5 years and sharing with investors what we are trying to do, what we will do in the next 5 years. We just completed year 3 of that 5-year plan, where we are building a truly global network, fully digital network of laboratories organized in a hub-and-spoke structure. So we get the benefits of scale in our large hub laboratories. And we have a network of local laboratories to collect samples close to our clients, serve our clients in their country, their language and yet be able in the large laboratories to implement automation, artificial intelligence and all the things that make our services much more unique and faster and more reliable than what others do and we do. So this is continuing to proceed at pace. I'm happy to report that I can confirm we should be done by 2027. There's been massive investments. And we start to see some of the benefits of that in our operating leverage, which has continued to improve every year. It improved well in 2025. Overall, our margins -- reported margins and our adjusted margins continue to improve year-on-year. Our EPS has shown a remarkable growth, 24%. And I think it's just the beginning because we still have heavy investment, heavy OpEx investment, especially in our deployment of digital solutions, development of digital solutions, which should give us significant [Technical Difficulty] and the cost of which will go down. We have generated before those investments to buy our sites because we prefer to own our sites. This is linked to the long-term view that we have. We think over the long term, although they provide a lower immediate return on capital deployed over the long term, we're going to use them forever. It's a great benefit to have them because we can expand on those sites. But before those investments, we have generated more than EUR 1 billion of free cash flow to the firm. So our group is starting to generate serious cash and it's just the beginning of that. And if I move to Page 6, the nice thing is that is accelerating in the second half. Organic growth is still not where it will be, we think, when -- and we'll talk about that later, but it's still accelerating quarter-on-quarter and half year-on-half year. Our EPS growth in the second half even reached 30%, which is quite remarkable. And our free cash flow has grown also much faster in the second half than in the first half. On our investment program on Page 7, you see that we are starting to be done. We still have massive IT investments that post 2027 should be less. And more importantly, we should get the benefit of that. We're still adding some start-ups, but you see the investment has started. We've done the peak of it, so it's starting to be less. So all of that is running according to plan. We still will add a few large and very efficient sites to our network over the next 2 years. They are being constructed right now, and we think the delivery will take place over the next 24 months, more or less for in our current perimeter that should take what we need in our program. On Page 8, we provide a bridge on the evolution of margin. And you can see we've had a nice underlying operating leverage. As we had flagged, we have some dilution from the acquisition for a very low amount as compared to the profits we think we can generate in 2 or 3 years of the network of clinical laboratories of Synlab in Spain. We are merging it with our network, and we're taking a lot of cost out. We've had a lot of exceptional costs for that. And that should -- the first phase should be completed by the middle of next year. We think we will create significant value from this combination. But nonetheless, short term, it has been dilutive, especially in the second half. First half, we only had 3 months. Second half, we had 6 months. We have a bit of an impact from the FX because we make more profits in North America, although we want to improve profits in Europe as we finalize this IT program and site consolidation. So a good improvement of margin, good drop-through on Page 9. If you see the trend, well, the COVID peak is well behind us, but we are catching up. Our revenues now are over the peak revenues from COVID. Our margin is catching up. It's -- and I think we are very confident in exceeding 24% margin in EBITDA -- adjusted EBITDA in 2027. And considering the benefit of that beyond 2027, I think there is some room to, at some point, maybe achieve or get close to the margins we had during COVID. So that's also encouraging. On the -- if you see -- if we look at the CAGR, we've had since 2019, 8% revenues CAGR, 35% CAGR of free cash flow to shareholders. So -- and that's ultimately the most important thing, while we still carry huge amounts of investments. And I think those investments, once we have built our network of labs, we have them for the next 20 or 30 years. So the growth of the EPS and the cash flow per share should be for quite some time over proportional to our total revenue growth. On the financial numbers on Page 11, you have a breakdown. I think I will go back to that as part of the question and answers. Main point is our profits are going in the right direction, are growing, growing faster than revenues and the EPS is growing also faster than revenues. We took the opportunities for us, the fact that our share price is massively undervalued is actually an opportunity, and we took advantage of that opportunity to acquire a lot of shares last year, which is even further boosting our EPS. And the impact of that, once we hit in 2027, our target -- margin targets and cash flow targets will be compounded. On Page 12, you have a bridge of our revenue evolution. We generated EUR 250 million of organic growth. Of course, it has been a bit diluted by the FX impact. And we have a sequential increase quarter-on-quarter of growth. And I think that will continue because now the comps that were strong in some areas, I can talk about it a bit later, will not be there next year as we enter -- or this year as we start 2026. On the Page 13, we give a bit more breakdown by area. I think all our areas are doing well. Life areas are doing well. Food & Feed and Environment are growing both in Europe, North America and Asia. BioPharma, and I'll come to that on the next slide, is starting to recover. It is still being soft, it is still being far from what we think we can achieve long term. Diagnostics could do a little bit better, but it's starting to show in many areas, some recovery. Q4, of course, didn't get the negative base effect of tariff reductions in France. Consumer. Consumer has been hit because consumer and technology includes some material science testing, microscopy, et cetera. This had a big boost in 2024 from the -- a lot of tools companies were looking at potential stricter export restrictions, both from Europe and North America to China. And there was a lot of anticipated buying of tools from our clients in 2024 that gave us a bit of boost on that in 2024, which is not -- has not recurred in 2025, but now we think '25 has hit a plateau and we should grow from there. But that explains the only 2.3% growth in Consumer & Technology. Consumer was better than that. On BioPharma. And here, we have, I think, the last year was a mixed picture. The bulk of it is our BioPharma product testing, where Eurofins is a global leader, and that has continued to do well, mid-single digits. We have done at times better, close to double digit or double digit on that. There is some potential upwards. And we have a good outlook for next year. We are adding a lot of capacity where we will be adding -- expanding our big site in Lancaster, expanding our site in the Netherlands. So we'll have more capacity coming online in the next couple of years. So there is some upside potential on BioPharma product testing, but the growth has stayed solid -- quite solid during the time where BioPharma is reevaluating its pipelines, hasn't been affected like Discovery. In Discovery, this is, we think, plateauing now. It's still a little bit down in the second half of the year. Genomics is still hurting from cuts in research fundings. But again, we think we're hitting now a plateau and we can grow from there. Agroscience is part of the ancillary activities, and that is still down significantly. So we have made significant efforts to cut our footprint. There has been massive restructuring for the size of that business, significant restructuring. That's also part of our SDI. We've closed a number of field stations to basically fit our capacity to the demand. There could be at some point upside when the agrochemical companies, Agroscience companies and the seed company have more visibility on regulations to get their products approved, especially in Europe. So we keep that activity where we are a global leader, but that has suffered. And between Genomics and Agroscience that explains a large part of the overall softness of BioPharma. Otherwise, BioPharma will be at the same level of growth as our Life activity -- area of activity. So our CDMO did well in the first half of the year in the U.S. because we -- or in Canada because we filled a tranche that got completed at the end of the year before. It's a bit less in the last quarter because now it's full, and we're going to have a next tranche coming up online in the next, I think, 24 months. CDMO was a bit softer in Europe. It was a bit more on smaller biologics clients, but we think this will pick up in the next few quarters, too. So that's for the ancillary activities for BioPharma. We have, of course, in BioPharma, some clinical works, large contracts and our clients are positive. on the start of those programs. And of course, that would switch completely the growth of the ancillary activities. If we look at the -- especially Central Laboratory, Bioanalysis, we do think that some point in '27, we will have -- we should have a significant boost from those activities. That's also hurting our profits because we keep capacity that is in excess of what we have as volume right now because studies should start relatively soon. We have significant demand from clients. So we're optimistic on that. And in any case, the -- we're now at a baseline where we don't think that would go down anymore and affect our BioPharma growth anymore in 2026. On Page 15, you've got a split of the margins. So the margins are growing everywhere, especially in the rest of the world. The rest of the world is catching up with U.S. margin. Europe has not been improving as much as we wanted. We've had an impact, of course, in Europe of the reimbursement cuts in clinical diagnostic in France that occurred in 2024 that affected the comparable with 2025. We've got the dilution from Synlab. We've got a number of other things. We think we have a big upside in Europe to increase the margins and make them move much closer to U.S. margins, which will also reduce the FX impact on the translational results and margin. So we're optimistic over the next 2 years to significantly increase the margins in Europe. Another thing that we do is described on Page 16. So we have labs that are well integrated, where we have deployed our IT solutions, where we -- that have been in the group for a long time. And then we have a number of start-ups that we launched over the next few -- the last few years. The peak start-up investment is behind us and the start-ups of the peak start-up years are starting to be profitable. As I mentioned earlier, we are opening fewer start-ups now. They have a smaller impact on our results. So that's part of our nonmature scope. On that scope, we also have companies like Synlab that we just bought and we are restructuring. And what is interesting to see is the impact of that nonmature scope on our overall results is starting to be less and less -- it's -- we have a target that SDI at EBITDA level will be less than 0.5% of our revenues, and we think we will achieve that by 2027 as planned. Anyway, even in 2025, the impact on the group EBITDA is starting to be negligible at 2.7%. But we will continue to show it separately and our reported results and the mature scope result will converge. It's nice to note that our mature scope is already achieving the 24% margin we are targeting for 2027. So overall, very encouraging results. On Page 17, you see that we are self-financing all our investments, including our M&A in -- with EUR 150 million left after that. And we've had, of course, in 2015, the purchase of our -- of the related party buildings. I'll come to that in a minute. But -- and that was an exceptional one-off investment. We spent EUR 540 million to buy back our own shares. And from next year, our cash flow should be such that we will have a lot of headroom for our cash flow to finance further share repurchase, for example, building repurchase is done. We won't have to spend money on that. So we can have a very compounding -- very well compounding model where with our cash flow, we can continue to do M&A, finance not only our CapEx, but our CapEx will be less. So we'll have more room for M&A financing and even more room for returning to shareholders and preferably through share buybacks as long as our share price remains so seriously undervalued in our opinion. On Page 18, you see that our teams are starting to do a better job in managing net working capital. We've got a good result this year in managing net working capital. And there is still potential of improving things further. We're not -- certainly not best-in-class there, but we're making progress, and we think we can do more. On funding on Page 19, we've continued our prudent financing management. We are well funded for the next few years. Our leverage is very reasonable considering our cash flow. Also, our EBITDA will increase over the next 2 years, we believe. So that will naturally bring the leverage down. We will generate some cash. So we're confident on maintaining our leverage between the 1.5 to 2.5 multiple range that we have set for ourselves as an objective. On Page 21, I illustrate some of the new sites that came online. We can talk about that. On Page 22, we can have a summary of our footprint. We have a quite large lab footprint. We are very far along in building our -- and completing our hub-and-spoke laboratory network in Europe and North America, especially. We still will have opportunities in Southeast Asia and Asia generally for the next 10 years or 20 years, also a little bit in Latin America. We can still add a few locations in North America. We're not -- we don't have 100% coverage yet, but the impact of what we need compared to what we have is -- will be very modest past 2027. And now we own most of our big sites. And what is planned for the next couple of years will mean that by 2027, we will own our big sites, and we usually have land next to that existing building so that if the demand increases for those hubs, we don't have to move. We don't have to lose all the investments we did in those buildings, which was our life for the last 10 years as we had to consolidate a lot of acquisitions that were not -- where we found them, they were not necessarily where they should be, and they didn't necessarily have the focus that we wanted or that was optimal for best efficiency. Now we have that footprint, and that will stay, and we can just incrementally add capacity on the same site as we need. So we're quite pleased about the progress. That was a 10 years program. Now we own what we need to own. On Page 23, some discussions on return on capital employed. I think that would be more for one-on-one meetings for those of you who are interested. But obviously, we have a mix of assets on our balance sheet. We have the labs that have grown organically and that have a very high return on capital employed. We have the lab that we acquired. And until 2018, we built Eurofins through a lot of acquisitions. So we incurred goodwill. And of course, that provides lower return on capital. We have a substantial amount of our capital on our balance sheet, which is those buildings that we own that have a book value of EUR 1.3 billion. Probably if we were to do a sale and leaseback, it would be more like EUR 2 billion or more. And that has, of course, a lower return. So we give on Page 23, an analysis of the returns of our business as we can see it. But it confirms that the business we run has a very high return on capital employed. And if we deploy additional capital, especially if we deploy it organically, we're looking at very significant returns. On Page 24, it covers the start-ups that we've made over the last few years and peak start-ups of '22, '23 as a whole are starting to be profitable. So we have -- and that can only amplify going forward. So we are very satisfied with what we have built and the impact it should have on our performance, our service to clients and financial results over the next 2 years and later. On Page 25, we give a list of some of the acquisitions we did. So we continue to be active. We think we also should add about EUR 250 million of revenues next year from acquisitions at reasonable multiple. That means a lot of small bolt-on acquisitions, maybe not the bigger ones that would be sold at a much higher multiple. But the world is big enough, and we have enough opportunities. We continue to be innovative. Our labs invent a lot of new tests and new capabilities. That's on Page 26, and I will not go through all of them. You probably have heard of the baby food -- latest baby food contamination with cereulide, which could be caused by Bacillus toxin. This is not a test that people were doing routinely most of the time. It normally doesn't happen. So -- but when the crisis started, we developed the test very quickly. We developed a test that's actually more sensitive than what was available before in the market because most of those things come from encapsulated in this specific contamination, it comes from oil that is added to vitamins or that is added in the form of oil encapsulated. And measuring it, you have to break the encapsulation to get to the full amount and the true amount. So we make a nice breakthrough here in developing within a very short time when the crisis started, the right test and the most sensitive test in the market, we believe. But we can go deeper on that if some of you are interested in Q&A. Page 28. We basically, we can only confirm that our objectives for 2027 are realistic. We think we will exceed them. The plans for CapEx are unchanged. And BioPharma will pick up in the next few quarters, we believe. So we're still confident that we can revert to the typical organic growth we've had for decades of 6.5%, just to give a number, but higher mid-single digits, mid- to high single digits. And we are building the network for that. And also the efficiencies and quality of service we are building should enable us to grow significantly faster than our competitors and than the market. On Page 29, we give some ideas about the returns that we are generating. So we were -- we are pleased to have returned EUR 1.5 billion to shareholders since 2021. So not only are we quite profitable, but we returned a lot of cash to our shareholders already, although we are still building the house, we return a lot. And we built Eurofins for a lot of acquisition until 2018, which caused us to incur a lot of goodwill on our balance sheet. But since then, we bought some companies, but much less. And if you look at the return on capital -- on the incremental capital we've added since then, after this big M&A phase, and you see that even including the goodwill, we already have 23% return on the incremental capital, which shows that we are reasonable in what we pay for acquisitions. We create value from our acquisition and our stock of businesses continue to improve. So we're very satisfied about the performance of 2025. We're very optimistic about what we think we will generate over the next 2 years and especially beyond. In fact, I think we are building something that's going to be quite extraordinary in our markets, more and more focused. We've been also reviewing our portfolio, shedding a few small things. So over the next 2 years, we'll continue to do that to be a true leader in our industry, to the most innovative in our industry. I don't have time to talk about it now because it's a result presentation, but we're investing a lot in new technologies, in AI, in automation to create real competitive advantage, a real differentiation in the speed and quality of our service, which should make us really the partner of choice of all the multinationals around the world in the industries we are serving. And I don't think anybody else is doing the type of investments we're doing. So I'm very positive and optimistic as to our performance post 2027 when we are done building that. When we are building that, this causes a lot of disruption to service when you deploy new IT solutions the last 2 years where we started deploying heavily new IT solutions. We've had a lot of disruption to service to clients. This is not the best when you change the digital tools in the company to show the best performance to clients. But this is now more and more working, and we see -- we're going to see the back end of that. And then we see the opposite, much better performance, faster performance, and that should help us also in growth and gaining market share post 2027 and where we have in the countries where we are done already, already in '26 and '27. So that's my introduction for today. And sorry for the very quick speed of my speech and presentation. Now I'm happy to answer questions, and [ Busi ] is here too, if we have some financial questions that I don't know the answer of. Operator: [Operator Instructions] Our first question is coming from Tom Burlton with BNP Paribas. Thomas Burlton: I've got a couple just on BioPharma to kick off and then one on capital allocation. So on BioPharma, specifically within ancillary activities and the Central Lab, Bioanalysis business, you referenced these awards. Is there anything you're able to give us in terms of additional details on sort of how big, anything slightly more granular about phasing and so forth? Because I was originally expecting some of these to start coming through in sort of mid-2025, and it feels like they got pushed to the right, I guess, because of client decisioning and things like that. And in your opening remarks, you talked about anticipating potentially a significant sort of boost in demand. But you said by 2027, and then you went on to say that some of those could ramp up quite soon. So I'm just trying to understand the timing there and what's going on? Because it feels like that when it does come through, it could be quite a big driver to Biopharma and then to group organic growth. The second one, still within BioPharma, just on the discovery part of the business. It looked like through the back end of last year, we've seen a bit of a pickup in terms of the biotech funding. And I think that only really accelerated to kind of through Q4. We don't have the kind of longer run, I guess, data on your discovery business by quarter. How would you think about the sort of normal lead lag time as to when that should flow through to your business, your network and we really start sort of seeing it in numbers? Just still trying to gauge the sort of, I guess, the cadence of BioPharma growth as we go through 2026. And then just on capital allocation, keen to understand kind of how you're thinking about buybacks. So you mentioned towards the end of your remarks, you've been very -- you've been active in buying back shares and returning cash to shareholders and the share price has developed, I guess. You've got fairly fixed targets in terms of your added M&A revenues and your leverage is, I guess, within the target range. Would you expect buybacks to be a kind of ongoing feature, maybe not at the levels they were in 2025, but how should we think about kind of ongoing return of cash and whether you'll be kind of pragmatic or consistent about that? Gilles Martin: Thanks a lot, Tom. On BioPharma, yes, Central Lab and Bioanalysis, we have some fairly large contracts. And our best guess now maybe would be H2 -- that we are talking about would be H2 2026 for start of that. It's always difficult to time. They have to recruit patients, et cetera. So that's our best guess as we can see. What is clear is the comp has eased now. So going forward, we don't expect anywhere those revenues going down. And if you do the math, if you have a negative 20% or negative 30%, even on a small part of the scope, that has a big impact on the average growth of that scope. So that -- we don't think we're going to have any negative, especially not of that magnitude going forward, and that should have an impact on the overall growth of BioPharma this year. And in the second half, hopefully, if we get those programs to kick in, it could become quite substantial. And well, maybe if I said 2027, I think overall, BioPharma, even our core BioPharma product testing could grow more than the mid-single digits where it is now. And that could also increase. When would that be? That's what maybe I said '27. But overall, BioPharma, I don't see why BioPharma as a whole shouldn't grow faster than life. It has been the case for decade. And this -- we've had phases like this again in 2012, where the pharma industry was reevaluating pipelines and so on. The industry was a bit soft for a couple of years, and then we've had a decade of much faster growth. So I think that will return. And why will it return? Because simply, the research is providing so many new products that are so powerful that it's just worth it for the pharma industry to spend money to develop those drugs because they will make a lot of profit with it. Even at lower reimbursement, they will make a lot of profits. Discovery, yes the lag time, that goes from company to company, project to project, but it's not immediate indeed before a project starts. What is it 6 months, 12 months to get things to flow through depending on the project and the products in actual work for even the coding, it takes 2, 3 months to design a study to design a project. It's not something that you buy off a catalog. All those studies for BioPharma, they are bespoke and they take time to define. It's like you build a house, you need to get the plans, get the plans approved before you can start building it. Capital allocation. Well, if you look at -- we're an active buyer in the market, and we also have our own assets that sometimes we get approached by people who would like to buy some of our potentially noncore assets. So we know what those assets are worth. If you look, ALS is trading at 15x EBITDA, UL is trading at 19 or 20x EBITDA. A lot of transactions are in that range between 15 and 20. Even with the recent rerating, our stock is trading at 10x. So obviously, if I have extra capital to deploy, it's a no-brainer to buy back our shares. I know what I buy. I know the potential of the profit increase of what I buy. I don't have to do -- we don't have to do a due diligence on it. We know what we're buying. And so once we've done the M&A, we think it will be accretive, and we think we can get our return over our hurdle rates. And if we have extra possibilities, we are going to continue to do buybacks. And I think we will generate a lot of cash. And actually, we might buy even more this year as we bought last year. Of course, that will depend on how the market view our share and share price, et cetera. But in spite of the recent good run of our shares, on those metrics, if you just look like the multiples of, that people pay for assets in the market, either public assets or private assets, we have -- we're anywhere between 30% and 60%, 70% undervalued. And in the capital allocation policy that our Board follows and we talk about, buying back our shares appears very attractive at the moment. To us, we're insiders. So we -- maybe if you're an outsider, there are other considerations that apply. As an insider, we will continue the buybacks. Operator: Our next question is coming from Suhasini Varanasi with Goldman Sachs. Suhasini Varanasi: A few from me, please. So you mentioned the cereulide testing that you had launched in January. Have you seen increased demand for that testing given the recalls seen in the market? And is it possible to quantify the proportion of benefit to revenues? That's the first one. Second one is on the margins. Your reported EBITDA margins have seen very strong underlying improvement in 2025. Can you perhaps provide some color on the scale of the expansion that you expect in 2026 and maybe the key risks around this. FX, obviously, is a little bit of a risk. We can't quantify that. Synlab, maybe the drag is a little bit less than last year. Or maybe additional M&A? Just some color around that would be helpful. Thank you. And I think in your prepared remarks, you had indicated something around EBITDA margins could potentially return to peak COVID levels beyond '27. Just wanted to understand -- get some clarity on that. And is it the medium-term target potentially beyond '27? Gilles Martin: Yes. cereulide, it is just starting. We don't know how big this crisis will be, how many charges, how many lots were affected. I'm not sure it will become a routine test because that was apparently caused by a contamination from contaminated oil from China. So hopefully, that will stop and be put under control. So we -- and considering the size of Eurofins, for something like that to become material, it would have to be a really massive, massive global recall of all the milk in the market. So we don't expect any impact -- any material impact on our revenues. But still, it's good for our clients to know that when there is something like that, we are there and we have the most sensitive methods, much more sensitive than the ISO method. So if they want to check their supplies, we can do that for them very well. Yes, we've gone on the advice of many of our investors and potentially analysts, we've gone away from giving specific margin targets. And some companies do that. We've done it for 2027, and we stick to that because they were there and we believe in it. And hopefully, we can do better than that. So for this year, what we've said we will improve. And as you say, some of the factors that you mentioned will play a role. FX, we don't exactly know what it will be. M&A, we don't exactly know. We have a number of start-ups. We have to see exactly how fast they ramp, new buildings when they come online, et cetera. So what we can say is we think we will improve. We think we'll achieve or do better than the 24% margin next year in '27. I can't be more specific this year. What is clear is we have massive investment in IT that we hope to largely complete this year. So that should help definitely next year. How fast all those programs get deployed, all those software gets deployed, how fast do they get -- do we start to accrue the benefits of it is also a little bit difficult to plan quarter-by-quarter. And what I said about margin, maybe don't get too excited too quickly. But it has always been the case that our best scopes have -- EBITDA margin in excess of 30%. The whole of Eurofins will never be there, but there's no reason why 24% should be a cap. Of course, we will talk about that once we complete that period. And depending on our perimeters then on potential M&A, we might do then, et cetera, we'll try to set objectives beyond 2027 when we publish 2027 results. But all things being equal, staying in our market, staying in our current perimeter, there's no reason why we shouldn't go beyond that because every year, we're improving. And there's a very long -- if I look at what we plan to achieve this year, there's a very long list of things we are doing that will improve our results substantially. And if on top of that, BioPharma starts to pick up a bit, it could be even more faster and more meaningful. Operator: Our next question is coming from Delphine Le Louet with Bernstein. Delphine Le Louet: A couple of questions on my side and a bit of a clarification regarding the infant baby formula product and how big that is actually today into the food business. And sticking with the food business with a broader vision, where are you taking the most market share? Or where have you been taking the most of the market share over the course of '25 when it comes to segments or region into that field? And second question, dealing with the CapEx envelope for next year and probably the year after in the range of EUR 400 million. I was wondering how much of that is dedicated to the regular, let's say, IT ongoing and to the IT transformation you're coming to a close now. Can you detail that a bit more, please? Gilles Martin: Thank you. It's really hard to say where we gain share or where we don't. I think we gained share, especially in the markets where we are strong in North America. I think we continue to gain share in the many European countries we do too. And this baby formula testing, this test is not something we were doing in the past. By the way, we just developed the test, but it's not going to be a huge market, a huge -- I hope so for the milk industry. Although from time to time, there are issues in the milk industry, and there were issues in North America and a lot of recalls in North America. We helped our clients a lot to go through the shortages to help them mitigate the shortages of the milk powder in North America over the last few years. So this is -- we work -- what we do is essential. People forget it, but there are segments of the population who are very fragile. And when they eat contaminated food, it can be fatal and especially babies. And we also test a lot of supplements, sport supplements. If you put not enough or too much vitamin in certain products, it can be toxic. It's not only the bacteriological contaminants. So this is more like a reminder of you can't stop testing food. If you stop testing food, bad things happen. And actually, it shows maybe nobody could have guessed that, that would happen. But it shows you have to have very broad testing programs because even if a contamination hasn't happened in 5 years, it doesn't mean it won't happen again. And if you have a brand that is valuable, you don't want to be the one whose products are contaminated. I think that's maybe one of the many wake-up calls. It's not because you haven't had a problem with your products in the last 5 years that you won't have one tomorrow. So testing is important. It's like having a fire detector, maybe you haven't had a fire in 20 years, but you best [Technical Difficulty] detector in your house or in your [Technical Difficulty] that can still happen. On the [Technical Difficulty] Operator: Apologies ladies and gentlemen. We have appeared to have lost our speaker line. One moment, please, while we try to get them back. Once again, apologies, ladies and gentlemen, we are trying to get the speaker line back in, one moment, please. Okay. Ladies and gentlemen, we have just heard from the speakers. They are trying to reconnect. So please hold, they would be with us momentarily. Okay. Ladies and gentlemen, I believe they will be with us in one moment. Once again, apologies for the slight delay in getting our speakers reconnected, but they will be with us shortly. Okay. I believe we have our speakers back with us. Gilles Martin: Thank you. Sorry, everybody. I don't know what happened with the telephone line. So I was answering the answer -- the question on IT CapEx and indeed, maybe EUR 50 million of the IT CapEx is linked to this development of new IT solutions for digitalizing our full network of laboratories. I think we can take the next question. Operator: Our next question is coming from Remi Grenu with Morgan Stanley. Remi Grenu: Just one last question remaining on my side. I think there's been press coverage around the potential divestment of part of your consumer and tech product testing business. So can you maybe tell us how you're thinking about that division in the context of the perimeter of the company? And if overall divestments are still very much on the table as you flagged on previous call and how we should think about you going into 2026? Gilles Martin: Thank you. Well, we get a lot of inbound calls. There are things businesses that we look from inside what we like, what we don't like. As I mentioned, there are smaller businesses in Clinical Diagnostics last year that we closed or sold in countries where we had no path to become market leader. We like our consumer product testing. We like our material science testing, although material science was softer in '25, we see a great potential with all the AI chips and the memories now that are in great demand and the needs for tools that's going to pick up. So we like that division. We like consumer products, and we'll never part with certain elements of it. They are very close to the core of our business of medical device and testing for life, et cetera. But we do get inbounds. And then we are -- when our boards get inbound, we have a duty to look at it because, of course, we get very attractive offers sometimes, extremely attractive compared to our current valuation. And so we have to look at it. What comes out of those reviews, we never can know, and we'll look at it. But I'm running a company as a CEO, but also as a member of the Board, I'm a capital allocator, and we have to look where we put our shareholders' capital to work. We have no limitation. We're not limited by the amount of capital we have to invest in our core sector, but maybe there might be at some point, M&A opportunities in our core area of business that are larger that we want to take on. And then maybe it's worth to have an active review of the value of all our assets. That's all I can say about that. Operator: Our next question is coming from Allen Wells with Jefferies. Allen Wells: A couple from me, please. Firstly, just maybe a financial question. I just wanted to understand some of the moving parts on the free cash flow for the business. Obviously, solid reported number, but it does include another working capital inflow in Q4 and obviously, year-on-year reduction in CapEx. I just wondered how you guys are thinking about the sustainability, particularly of those two variables as we move back towards the ambition of a mid-single-digit growth level business. Maybe you can talk a little bit about the drivers of that working capital movement because I think it's the second year in a row you've had an inflow at the full year? And likewise, on the CapEx side, it sounds like you expect similar levels of CapEx in 2026 versus 2025 or maybe even slightly lower. Can that level of CapEx support an acceleration in growth up to the kind of 6.5%? That's my first question. And secondly, just a follow-up question on [Technical Difficulty] net-debt-to-EBITDA towards the upper end of your, I guess, preferred range. You talked about the potential to do more buyback of shares in 2026. But if I assume a similar CapEx and M&A trends, it doesn't look like that will be self-funded at least on my back of the envelope calculation says. So are you happy to run net-debt-to-EBITDA up towards the top or even above the top end of that range? Gilles Martin: Very much. Yes. Well, we did a good job in working capital this year. And of course, that is finite. We're not going to get very big negative net working capital. I think we might still have a little bit of room over the next 2 or 3 years to be better at collection. We're not as good as maybe we should be at collection. And so -- but that's always a fight, of course, with our clients who want to pay later. And we -- but they don't always pay on time like in any business. So I think we can be better at getting our clients to pay on time. And we're kind of kind to many suppliers. So we pay maybe a bit too fast. So I think I couldn't tell how fast net working capital will be improving, and it can maybe 1 year be a bit less good and so on. So that element, I think it was a good year of EUR 40 million or EUR 50 million this year and last year will not be a gain of EUR 50 million every year forever, obviously. I think long term, we can do a little bit better. That's what I can say on the net working capital. On CapEx, I think we have a high CapEx at the moment. Our maintenance CapEx is 2% or 3%. And with that, we can grow mid-single digit. And so with CapEx at EUR 400 million ex investment in own sites, we have headroom. We didn't quite spend the EUR 400 million in the last couple of years in '24 and '25. So we're a little bit below in '24 and '25. But we are confident our EBITDA will increase. If you run the numbers, we don't want to give a number, but if you put 24% of whatever revenues you model based on M&A, et cetera, you're getting close to EUR 2 billion or around EUR 2 billion of EBITDA. And if the free cash flow conversion is over 50% -- significantly over 50%, that's a lot of cash to use for buybacks and M&A. So we have headroom -- and as we talked about assets, when we look at certain assets that could give even more headroom. But we cannot predict the future. A lot of those things look at what we could buy for M&A. I don't know what is going to come our way at a value where we find we can get a good return. That is definitely very hard to plan. And the same thing, are we going to keep all our assets or maybe some marginal ones we will dispose of for very high multiples. We did it already for the -- what is it called our software testing business and media testing business. I think we sold it for 18x EBITDA because we've got a really good offer. This is -- there's a bit of opportunism on that level of capital management depending on our own M&A opportunities and the level of our share price. So net-debt-to-EBITDA, on the other hand, we don't want to exceed the 2.5x. That's clear. And I think overall, if you look at all the cash flow we should be generating this year and next year, unless our share price would be very depressed for that period, we should rather move down than up on the net-debt-to-EBITDA multiple. Allen Wells: Can I ask one kind of additional question? Just looking at the numbers around Europe as well. We know obviously that growth accelerated in Q4 to 5%. That was on a slightly easier comp. It looks like a chunk of that improvement was the diagnostics business, which we know there was a bit of comp effect. Was there any contribution in that Diagnostics business from the organic growth in Synlab or maybe what's the organic contribution from Synlab in there? Because obviously, I know that you account for the organic growth from day 1. Gilles Martin: I think it was 0 in Synlab. It's negative actually because we are shedding some contracts that were loss-making. So... Allen Wells: Just the Diagnostics, the underlying Diagnostics business coming back, nothing from Synlab? Gilles Martin: And I think also Synlab is part of M&A. And so it's -- so no, Synlab is not-- another thing, I think looking at figures after the comma in organic growth per quarter and trying to analyze changes that post-comma changes on organic growth quarter-to-quarter is not really meaningful. It can be one contract, it can be just when something finishes, the contract finishes, doesn't finish. I wouldn't extrapolate too much, especially if you look at it at smaller slices like one activity in one continent. Operator: We will take our final question today from François Digard with Kepler Cheuvreux. François Digard: I will -- maybe just a follow-up on cereulide analysis. Could you share with us how quickly you were able to roll out these tests? You shared already that the commercial implication is limited, but it's interesting to understand how you have processed through that, the first question. The second question is on BIOSECURE Act in the U.S. Do you expect it to be a tailwind for you? Or could your France, European nationality in state prove to be a disadvantage in the U.S.? Gilles Martin: Well, we have several labs around the world doing this test at the moment, and some are still setting it up, and they are cooperating to exchange method because that could be also an issue for clinical diagnostics in human health. I don't know if you heard, but in some countries, even the government labs didn't have a proper test to test the stool of the babies that were affected. So I don't know the exact minute how many of our labs are actually doing it. But when it all started, I think within a week, there was a test running at one of our labs. And maybe we might have had a lab that was already able to do it, but was not performing the test routinely because the demand was not there. And BIOSECURE Act, I don't know that it will have any impact. I mean I'm not sure I've heard from anyone in our company that would have an impact one way or another. No, we do our own testing locally in every country. So we have local companies that do testing in Europe, others do -- are based in China, the local testing in China, local companies in the U.S. doing testing in the U.S. I have to conclude -- sorry operator. Yes, I have to conclude and thank everybody for joining our call. It was a long presentation. I apologize, but I tried to give some color from the management perspective on our numbers. I will be happy to meet some of you in London and for other meetings over the next couple of weeks and later during the year. Thanks a lot for your support, and have a great day. Goodbye. Operator: Thank you, Dr. Martin. Ladies and gentlemen, the floor -- sorry, the call is now concluded, and you may disconnect your lines. And we thank you for joining us, and have a pleasant day.
Operator: Ladies and gentlemen, welcome to the STMicroelectronics Full Year 2025 Earnings Release Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Jerome Ramel, EVP, Corporate Development and Integrated External Communications. Please go ahead, sir. Jerome Ramel: Thank you, Maura, and thank you, everyone, for joining our fourth quarter and full year 2025 financial results call. Hosting the call today is Jean-Marc Chery, ST President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, President and CFO; and Marco Cassis, President, Analog, Power and Discrete, MEMS and Sensor Group and Head of ST Microelectronics Strategy, System Research and Application and Innovation Office. This live webcast and presentation materials can be accessed on ST Investor Relations website. A replay will be available shortly after the conclusion of this call. This call will include forward-looking statements that involve risk factors that could cause ST results to differ materially from management's expectations and plans. We encourage you to review the safe harbor statement contained in the press release that was issued with the results this morning and also in ST's most recent regulatory filings for a full description of these risk factors. Also to ensure all participants have an opportunity to ask questions during the Q&A session, please limit yourself to one question and a brief follow-up. Now I'd like to turn the call over to Jean-Marc Chery, ST President and CEO. Jean-Marc Chery: Thank you, Jerome. Good morning, everyone, and thank you for joining ST for our Q4 and full year 2025 earnings conference call. I will start with an overview of the fourth quarter and the full year 2025, including business dynamics, and I will hand over to Lorenzo for the detailed financial overview. I will then comment on the outlook and conclude before answering your questions. So, starting with Q4. We delivered revenues at $3.33 billion, above the midpoint of our business outlook range, driven by higher revenues in Personal Electronics and to a lesser extent in Communication Equipment and Computer Peripheral and Industrial, while Automotive was below expectations. Gross margin of 35.2% was also above the midpoint of our business outlook range, mainly due to better product mix. Excluding impairment, restructuring charges and other related phaseout costs, diluted earnings per share was $0.11, including certain negative one-time tax expenses impact of $0.18 per share. Q4 revenue marked the return to year-over-year growth. During the quarter, we further worked down inventories, both in our balance sheet and in distribution, and we generated a positive $257 million free cash flow. Looking at the full year 2025. Net revenues decreased 11.1% to $11.8 billion, mainly driven by a strong decrease in Automotive and to a lesser extent, in Industrial, while Personal Electronics and Communication Equipment and Computer Peripheral both grew. Gross margin was 33.9%, down from 39.3% in full year 2024. Excluding impairment, restructuring charges and other related phaseout costs, diluted earnings per share was $0.53. We invested $1.79 billion in net CapEx, while generating free cash flow of $265 million. Let's now discuss our business dynamics during Q4. In Automotive, during the quarter, we grew revenues 3% sequentially. Year-over-year revenues declined, but with continued improvement in the trend. Automotive design momentum progressed with design wins across both electric and traditional vehicle domains for applications such as onboard chargers, DC-DC converters, powertrain and vehicle control electronics. These included design wins for power semiconductors, smart power devices, automotive microcontrollers, analog and sensors. These awards supported by engagements with various OEMs and Tier 1 ecosystems, strengthen our position as a key supplier to the automotive industry. Regarding the acquisition of NXP's MEMS sensor business, the transaction we announced in July is still expected to close in H1 2026. In Industrial, revenues were better than expected, showing increases of 5% sequentially and 5% year-over-year. Importantly, inventories in distribution further decreased and are now normalizing. In Industrial, our portfolio of microcontrollers, sensing technologies and analog and power devices is strongly positioned to support industrial transformation trends and the need of physical AI. During the quarter, we saw design wins across industrial automation and robotics, building automation, power systems, health care and home appliances. In November, we held our STM32 Summit where we announced several key innovations, including the first microcontroller built on the 18-nanometer process, a next-generation wireless microcontrollers and an updated suite of edge AI software tools. Personal Electronics, fourth quarter revenues were above our expectations, down 2% sequentially, reflecting the seasonality of our engaged customer programs. During the quarter, we strengthened our position in mobile platform and connected consumer devices, both with our engaged customer programs as well as our open market offering for devices such as our sensors, secure solutions and power management products. Revenues for communication equipment and computer peripherals were up 23% sequentially, better than expected. In AI and data center infrastructure, we continue to reinforce our position supporting the increasing demand for higher power density and energy efficiency. During the quarter, we secured multiple design wins for silicon and silicon carbide-based power solutions, supporting next-generation AI compute architectures. We also continue to work with customers to bring our silicon photonics technology to the market. The strong momentum in optical connectivity technologies for data centers also contributed to a significant rise in demand for our high-performance microcontroller used in pluggable optics. The low-earth orbit satellite business based on our BiCMOS and panel level packaging technologies continued to progress during the quarter with shipments ramping to our second largest customer. Moving to sustainability. We remain on track for our key 2027 commitments. Carbon neutrality in all direct and indirect emissions from Scope 1 and 2 and focusing on product transportation, business travel and employee commuting emissions for Scope 3 and 100% renewable energy sourcing. A major milestone this year was the launch of Singapore's largest industrial district cooling system at our Ang Mo Kio facilities in Q4. We also continue to maintain our strong presence in the major sustainability indices where we were honored to be recognized in the Time world's most sustainable companies list for the second consecutive year. Now over to Lorenzo, who will present our key financial figures. Lorenzo Grandi: Thank you, Jean-Marc, and good morning, everyone. Let's have a detailed review of the fourth quarter. Starting with revenues on a year-over-year basis by reportable segment. Analog products, MEMS and sensor grew 7.5%, mainly due to Imaging. Power and Discrete products decreased by 31.6%. Embedded Processing revenues were up 1% to 2% with higher revenues in general purpose and automotive microcontrollers, offsetting declines in connected security and custom processing products. RF and optical communication grew 22.9%. By end market, communication equipment and computer peripheral and personal electronics both grew by about 17%. Industrial grew by about 5%, while automotive decreased by about 15%. Year-over-year, sales increased 0.6% to OEM and decreased 0.7% to distribution. On a sequential basis, Power and Discrete was the only segment to decrease by 3.9%. All the other segments grew, led by RF and optical communication up 30.5%, while Embedded Processing and Analog products, MEMS and sensor were up, respectively, 3.9% and 1.1%. By end market, sequential growth was led by communication equipment and computer peripherals, up 23%. Industrial was up 5% and automotive was up 3%, while Personal electronics declined 2%. Turning now to profitability. Gross profit in the fourth quarter was $1.17 billion, decreasing 6.5% on a year-over-year basis. Gross margin was 35.2%, decreasing 250 basis points year-over-year, mainly due to lower manufacturing efficiencies and to a lesser extent, negative currency effect and lower level of capacity reservation fees. On a sequential basis, gross margin improved by 200 basis points. Q4 gross margin included about 50 basis points of negative impact resulting from a nonrecurring cost related to our manufacturing reshipping program. In the next few quarters, we expect a similar negative impact on gross margin from the just mentioned nonrecurring costs. Total net operating expenses, excluding restructuring, amounted to $906 million in the fourth quarter, slightly increasing year-over-year due to unfavorable currency effect. They were slightly better than expected, reflecting our continued cost discipline and the initial benefit from our cost savings initiative. For the first quarter 2026, we expect net OpEx to stand at about $860 million, decreasing quarter-on-quarter. As a reminder, these amounts are net of other income and expenses and exclude the restructuring. In the fourth quarter, we reported $125 million operating income, which included $141 million for impairment, restructuring charges and other related phaseout costs. These charges are related to the execution of the previously announced company-wide program to reshape our manufacturing footprint and resize our global cost base. Excluding the nonrecurring items, Q4 non-U.S. GAAP operating margin was 8%, with Analog product MEMS and Sensor at 16.2%, Power and Discrete negative 30.2% Embedded Processing at 19.2% and RF and Optical Communication at 23.4%. Fourth quarter 2025 net loss was $30 million, including certain onetime noncash income tax expenses of $163 million compared to a net income of $341 million in the year ago quarter. Diluted earnings per share was negative $0.03 compared to $0.37 of last year. Excluding the previously mentioned nonrecurring item related to the impairment, restructuring charges and other related phaseout costs, non-U.S. GAAP net income stood at $100 million and non-U.S. GAAP diluted earnings per share stood at $0.11, including certain negative onetime tax expenses impacting of $0.8 per share. Looking now at our full year 2025 financial performance. Net revenue decreased 11.1% to $11.8 billion. In terms of revenue by end market, Automotive represents about 39% of our total 2025 revenues. Personal Electronics about 25%; Industrial, about 21% and Communication and Computer Peripheral about 15%. By customer channel, sales to OEMs and distribution represent 72% and 28%, respectively, of total revenue in 2025. By region of customer region, 43% of our 2025 revenues were from the Americas, 31% from Asia Pacific and 26% from EMEA. Gross margin decreased to 33.9% for 2025 compared to 39.3% for 2024, mainly due to lower manufacturing efficiencies and to a lesser extent, the price and mix, lower level of capacity reservation fees, negative currency effect and higher unused capacity charges. Operating income stood at $175 million compared to $1.68 billion in 2024. Excluding $376 million for impairment, restructuring charges and other related phaseout costs, non-U.S. GAAP operating margin was 4.7%. On a reported basis, net income was $166 million and EPS was $0.18. On a non-U.S. GAAP basis, they stood respectively at $486 million and $0.53. Net cash from operating activities totaled $2.15 billion compared to $2.97 billion in 2024. Net CapEx expenditure was $1.79 billion in 2025, in line with our revised expectation and lower than the $2.5 billion of 2024. Free cash flow was $265 million positive in 2025 compared to the $288 million positive of the previous year. Inventory at the end of the year was $3.14 billion compared to the $3.17 billion at the end of the third quarter and $2.79 billion one year ago. Days sales of inventory at quarter end were 130 days, slightly better than our expectation compared to the 135 days for the previous quarter and 122 days in the year ago quarter. Cash dividends paid to stockholders in 2025 totaled $321 million. In addition, during 2025, ST executed share buybacks totaling $367 million. ST maintained its financial strength with a net financial position that remains solid at $2.79 billion as at end of December 2025, reflecting total liquidity of $4.92 billion and total financial debt of $2.13 billion. Now back to Jean-Marc, who will comment on our outlook. Jean-Marc Chery: Thank you, Lorenzo. Now let's move to our business outlook for Q1 2026. We are expecting Q1 '26 revenues at $3.04 billion, a decrease of 8.7% sequentially, plus or minus 350 basis points. We expect our gross margin to be about 33.7%, plus or minus 200 basis points, including about 220 basis points of unused capacity charges. This business outlook does not include any impact for potential further changes to global tariffs compared to the current situation. In terms of net CapEx for 2026, we plan to invest about $2.2 billion to support capacity addition for selected growth drivers like those for cloud optical interconnect and our manufacturing reshaping plan. To conclude, 2025 turned out to be a challenging year for the end market we serve, characterized by continued inventory correction in automotive and industrial, in particular, the first part of the year. The second half was better with gradual improvement of the revenue trend and a return to a year-on-year growth in the fourth quarter. We are entering '26 with a better visibility than entering '25 with the inventory correction in distribution progressively improving. Beyond the evidence of a cycle recovery, ST will benefit from the following company-specific growth drivers. In automotive, we see solid momentum in our engaged customer programs in ADAS, where we expect to grow this year and in the coming years. In silicon carbide power devices, following a significant contraction in 2025, we anticipate a return to revenue growth in 2026 with revenues projected to recover to 2024 levels by 2027. In sensors, we see strong demand, both in MEMS and imaging sensor and our planned acquisition of NXP MEMS business will strengthen our leading position across the automotive and industrial segment. In industrial, in general purpose MCUs, building on market share gains 2025 and a road map of new product launch for 2026, we are on track to return to our historical market share of about 23% by 2027. In Personal Electronics, where we continue to see strong momentum in our engaged customer programs in sensors and analog, we should keep on benefiting from increased silicon content in 2026 and beyond. In communication equipment, computer peripheral, in data centers, including cloud, optical interconnect and power and analog for AI servers and data centers, with the current market dynamic, we believe we can deliver $1 billion revenue before 2030 with already USD 500 million in 2026. In low-earth orbit satellites, we are expanding our customer base, and we anticipate continued revenue growth as low earth orbit constellation projects expand globally and penetrate new applications such as direct-to-cell constellation. Lastly, ST is uniquely positioned to address human wind robotics through our broad portfolio, spanning MCUs, MEMS, optical sensors, GNSS and power management. We are already generating revenues through engagements with major OEMs, and we estimate our current addressable bill of material at about $600 per system. Thank you, and we are now ready to answer your questions. Operator: [Operator Instructions] Our first question comes from Francois Bouvignies from UBS. Francois-Xavier Bouvignies: My first question maybe for Jean-Marc, I wanted to come back to what you said about the outlook. I mean, if we look at your revenue guidance down 8.7% quarter-on-quarter, this is below seasonal -- better than seasonal, sorry, of minus 11%. And if we take into account less days, it's actually significantly above seasonal. So, I was wondering, I mean, this is looking quite interesting. And if we compare to other peers like TI yesterday or ADI and Microchip, you see a number of your peers talking about above seasonal. I mean what's your view on the trajectory from here? Do you think this above seasonal trend can carry on a little bit? Or we shouldn't get carried away like we did in the last two years where we have many fall starts? Do you see like a very genuine evidence of a cycle recovery from here? Jean-Marc Chery: Well, we will not guide for 2026 today, clearly, but we are confident in our ability to grow organically for next year. But it's clear that we enter in a better and healthier situation compared to '25. If you remember last quarter, okay, I already shared with you that we were seeing a backlog that were reading during the quarter better than the usual seasonality. And today, with the visibility we have on Q2 that generally speaking, okay, is plus, let's say, low mid-single digit, but we absolutely see no reason that we will not be at least capable to deliver it. More important, I think, beyond the cycle is to share with you that we see for the company some specific growth driver. First of all, in automotive, clearly, we will have the sensor. And at a certain moment, when we will complete the acquisition of NXP, of course, it will bring additional revenues. This is obvious. But we see also positive momentum on ADAS ASICs and the silicon carbide after last year that was pretty challenging. Well, in industrial, clearly, the dynamic is really strong, thanks to the inventory correction gone, but more important is our portfolio. So we have done a tremendous effort in introduction of new products in '25 and '26, and this will contribute beyond the cycle. For Personal Electronics, our engaged customer program, you know that we have the visibility, okay? So I confirm to you. So we confirm that it will support us beyond the cycle. And last but not the least, data center. But clearly, in 2026, cloud optical interconnect, so means both photonics ICs and analog mix signal by CMOS ICs plus our high-performance general purpose microcontroller will contribute because you know that the connectivity engine of the server will move to optical one. So this will be certainly an acceleration. And as well, we will start to contribute to the power supply unit and to the server from the green to the processor. Last but not the least, beyond the cycle in '26, we see also low earth orbit satellite communication with our engaged customer program, so with our ASICs really positive. This will be a bit offset by the capacity fee reservation. But all in all, I confirm really our confidence level to grow organically in 2026 and because we have, let's say, significant growth driver beyond the cycle of the market. Francois-Xavier Bouvignies: Very clear. And yes, maybe on the gross margin side, I mean, with it, I mean, obviously, it's a concern for the market. You delivered the guidance is in line on the gross margin, but 33.7%. But when I look at the consensus, it has 35.6% of gross margin for the year. So it would assume a recovery from here. So with the top line that you described nicely, should we see as well an improvement of gross margin from the level in Q1? Lorenzo Grandi: Maybe I take this one, Jean-Marc, about the gross margin. But today, of course, the gross margin will depend on the evolution of the revenue in the course of the year. As explained by Jean-Marc, we expect, let's say, to increase. But the gross margin today that we see in Q1, we believe is clearly the lowest point in the year, this expectation of 33.7%. So we will see some increase. This increase is also driven by the fact that we expect to have constantly reduction in our unloading charges during the year. So we expect some mild increase for the second quarter and then a more significant increase also driven by the seasonality of the revenues in the second half of the year. Yes, at this stage, we can say that the expectation for us is to have increase in our gross margin all over the year. Operator: The next question comes from Andrew Gardiner from Citi. Andrew Gardiner: I was interested, Jean-Marc, in digging a bit deeper into the automotive space. Clearly, your largest end market and the one where we're still seeing the most difficulty in terms of getting through the bottom of this cycle. There's a number of sort of end market data points out there that are, I suppose, still causing investors' questions in terms of the health of the market, tariff threats back and forth admittedly, but also not helping. I'm just wondering how -- can you give us a bit more detail in terms of how you're seeing your customers behave? Do you think inventory is absolutely at a bottom in terms of the automotive channel and at the OEMs and the Tier 1s. What kind of confidence do you have as we look into the future quarters that we can return to stronger demand trends? Jean-Marc Chery: Well, first of all, clearly, when we see our Q4 revenue in automotive, it was slightly below our expectation and mainly, in fact, driven by the pulling from inventory a little bit lower than expected from some Tier 1 means that the automotive market for, let's say, legacy application, clearly is pretty soft. Inventory correction is certainly gone, but there is a kind of a softness of this kind of application. What will be positive on automotive is clearly what is around, let's say, the electronic architecture, the new software-defined electronic architecture calling for more complex MPU, MCUs definitively. So this will be an important growth driver. But we know that the electrical powertrain will be still an important driver. But here, it is more the competition landscape that changed completely compared a few years ago because you see that out of, let's say, more than 30 million vehicles produced in China, more than half are battery based compared to America, where it is more marginal in terms of production. And in Europe, it is below 1/3. So here, it's more a question of the competition is in China. So you know that in China is more complex to compete. But the powertrain electronics, the demand is there. So, all in all, I think the automotive market based on 90 million, 92 million, 93 million vehicles out of which 17 million to 18 million vehicle battery based and similar number in hybrid is still changing in terms of mix as well from the car classification is more middle end or premium car, even this car now embed some electronics. So the market is not yet stable. So that's the reason why we have to be, let's say, cautious to adapt ourselves. But we see a different situation compared entering in '25, where we faced very strong inventory correction in Q1 last year, if you remember, from our main customer, this will not be repeated. It is more, let's say, a progressive stabilization of the market in terms of mix of car electrical hybrid thermal combustion engine and mix of car between high premium, premium and middle class and mix between China, APAC, Europe and Asia. So this is something we have to, of course, closely monitor and adapt ourselves with our supply chain. So this is how we see the automotive market. Andrew Gardiner: Just a quick follow-up, given you mentioned China at length there. How is the partnership with Sanan progressing? Is that going as you anticipated? Is it helping your competitiveness in that market? Or is it still too early? Jean-Marc Chery: No. Clearly, so we will start to ramp up the facilities now, okay? We have modernized. We know exactly the efficiency of this fab. And clearly, it will be a key success factor in our capability to compete on the Chinese market. Operator: The next question comes from Joshua Buchalter from TD Cowen. Joshua Buchalter: I actually wanted to drill into the Personal Electronics segment a little bit more. I think there's some concerns of disruption or even pull-ins in the short term due to higher memory costs. It came in better in the quarter. Maybe you could walk through what the drivers you're seeing are there and if you're seeing any changes in order pattern. And I believe you called out higher silicon content in 2026. Was that referring to expectations for your largest customer this year? Jean-Marc Chery: Yes, you know that our revenue are mainly driven by our biggest customer and more on the high-end kind of product, which are, in some extent, less sensitive to the memory price. So, at this stage, with the visibility we have, first of all, we don't see significant impact detected by us. And I confirm that we expect to keep growing in personal electronics driven by our main customer in 2026, thanks to our increased device based on silicon and not module content increase in '26. So far, PE will be a growth driver for us in '26. Joshua Buchalter: And then I think the last couple of quarters, you've been kind enough to give us your book-to-bill ratios in auto and industrial. It seems like things are getting better on the industrial side in particular. Can you update us, I guess, on those metrics and whether you're mostly done with the channel inventory clearing on the industrial side? Congrats on the solid results. Jean-Marc Chery: No. In Industrial, the book-to-bill was well above parity. Clearly. Also, beyond your question, I can tell you that the POS were growing, let's say, between low teens, mid-teens, which is a good news. So we continue to decrease our inventory. But on automotive is the book-to-bill is a little bit more complex because we have some few key customers that are putting order in one shot for six months. So the book-to-bill must be, let's say, assessed on one-year moving average or six months moving average. So corrected from this, let's say, abnormal, let's say, process, the book-to-bill was parity on automotive. Operator: The next question comes from Stephane Houri from ODDO BHF. Stephane Houri: I just wanted to come back a bit on the scenario for the year, and I know you're not guiding. But historically, you've been saying that the second half is like 15% above the first, that's normal seasonality. And then on the top of that, you may have some specific programs. With the sting point you guide on Q1 and we look at -- when I look at the consensus for the full year, it seems to be banking on something lower than that because of the starting point in Q1. So can you just confirm that you see now that the inventory correction is done normal seasonality throughout the year and maybe give some comments about the adds of some customer engage program? Jean-Marc Chery: No. On the inventory correction, what we communicated, okay, I and Lorenzo and myself is to say by end of Q2, we believe we will be hold the excess of inventory. And this today, I can confirm -- it's already the case for many product family. We are still here and there some pockets of excess inventory versus what we see. But looking at the current dynamic, POS, POP by end of Q2, this will go. So now it's sure that in H2, we will be exposed directly to the end demand. Now about again, what we consider engaged customer program be the cycle, let's say, we can split I have to say. One is the usual personal electronics, and why we say it's cycle is because silicon content increase, okay? So we have the visibility with the current visibility we have, okay? So this will help us to grow the cycle of personal electronics and assuming our main customer will perform in market share really well performed in 2025, okay? So this will drive our growth. Moving to communication equipment and computer peripheral, well, communication equipment. Communication equipment, it is clear that for the lower or satellite communication is an important driver because thanks to our capability to supply and compete, our growth is driven by our largest customer in this field of activity. And as we see is pretty successful. And certainly this year, will be another demonstration of the success. Now since two quarters, we are supporting our second largest customer that is growing as well. So it is clearly beyond the cycle. So this will be a significant growth driver beyond the cycle for ST. Last but not the least is AI data center. You know AI data center, okay, we were, let's say, a bit delay for what call the device addressing the power station we are in, let's say, process to close the gap and offer solution to our customers. But clearly, we will be at of the business dynamic, it is the optical engine or the cloud optical interconnect. So its photonics ICs, MOCs and high performance general microcontroller. And this will contribute to the growth of ST significantly in 2023. Then moving to the more, let's say, traditional market focus we have, so automotive industrial. For ADAS, ASIC, last year was a challenging one because we saw some inventory correction on, let's say, some legacy ASIC. But this year, okay, clearly, with the visibility we have, this will be a booster of growth. Finally, our SiC MOSFET, about the difficult year of '25 will grow again. And I can confirm to you that up to now in Q1, we have a good book-to-bill on silicon carbide that is very encouraging. And definitely, our sensor contribution with the acquisition of NXP MEMS plus the existing imaging sensor, existing MEMS we have. And I am very pleased that beyond the inventory correction done on general purpose microcontroller, the proliferation of our new products are really paying back very well. And I am really confident that in '27, we come back to our historical market share and '26 will be an important step to demonstrate it. So this is actually in a few words how we can describe '26. Stephane Houri: I have a small follow-up on the gross margin comments. I think last quarter, you said that you think you would end up Q4 2026 above the level of Q4 2025 in gross margin. Do you still feel confident with what you see developing the mix, the underloading charges, et cetera, et cetera? Lorenzo Grandi: Yes. Yes, I confirm that at this stage, the expectation is that Q4 this year '26 should be better than Q4 '25. Operator: The next question comes from Domenico Ghilotti from Equita. Domenico Ghilotti: A couple of questions. The first is on the unloaded charges. You are guiding for a significant drop in Q1. trying to understand despite the lower sales, I'm trying to understand if you see this number at the bottom and if you are already benefiting from, say, the efficiency plan that you carried out. And second is some color on, if you can, on the second client in low earth orbit. So should we assume that it is a significant number or just starting entrance of new clients or an add-on, but not particularly relevant? Lorenzo Grandi: Maybe I'll take the one of the unused charges. Yes, unused charges are declining in the first quarter. There are -- the reason -- the main ingredient of the declining in this quarter is the fact that, as you know, we are progressing with our programs to reshaping our manufacturing infrastructure. This program is progressively reducing our capacity in 6-inch for silicon carbide, 150-millimeter for silicon carbide and 200-millimeter for silicon. And we start, let's say, to move ahead on this plan. So this is, if you want, is something that is mechanical. At the end, the capacity is reduced. We are now moving our product on the existing capacity on one side, 8-inch for the silicon carbide and the 300-millimeter for the silicon. So that's why we see the level of unused capacity, notwithstanding that the revenue are lower in respect to the previous quarter to reduce. This trend will continue. Unused capacity will not disappear in the year, but will significantly reduce in the year and will be one driver for our improvement in the gross margin in the course of 2026. Jean-Marc Chery: About the second question, yes, it's significant. If not, we will not mention. But I can just confirm you to number in Q4, our CCP segment grew sequentially 23% and year-over-year 22%. Definitively, it is linked to the low or satellite business we have, and it is driven both by our first customer and then by the second one. So at 22%, 23% growth sequential and year-over-year, so you can conclude it is significant. Operator: The next question comes from Sandeep Deshpande from JPMorgan. Sandeep Deshpande: My question is about your fab loading into the current quarter. Given what is happening with the gross margin in the current quarter, how is the fab loading going through in the quarter? And how is the mix shifting overall in terms of the gross margin? Because you have a revenue decline, but the gross margin is declining. So are you reducing your fab loading this quarter? Or are you increasing your fab loading? And my follow-up question associated with that is how the mix, particularly associated with your better margin microcontroller products is shifting? Lorenzo Grandi: In the quarter, as I was saying before, the unloading charges is mainly related to the fact that we are moving out capacity, reducing capacity in certain specific fabs. where, of course, we are now moving production in different fabs, 300 millimeters, so reducing our capacity. So at the end, when you look at the level of loading, we are not overloading our production, let's say, in the quarter. Clearly, if you look the inventory and you look where it will be the dynamic of the inventory in the quarter, as usual, you know that there is this seasonality in our inventory in which in the first half, our inventory is somehow increasing and then decreasing in the second part of the year. So, at the end, what it will be the impact is that now the expectation is end the quarter Q1 in the range of 140 days of inventory compared to the 130 days where we stand today. But I repeat that this is more related, let's say, to the normal dynamic of our inventory over the year than, let's say, loading our manufacturing infrastructure in a way that is -- the impact on unloading charges is mainly related to the fact that we started with our programs to reduce capacity in some specific areas. Clearly, the impact -- the positive impact, let's say, of this in terms of gaining efficiency and so on will come probably later, as you know, in our, let's say, manufacturing infrastructure. We do expect our program to be -- to start to yield a positive impact in our -- in our manufacturing efficiency more in 2027 than this year. But one of the impact that visible is the reduced level of unloading. Together also with the expectation of growth in terms of revenues. This we will see during the year, let's say, depending on the level of growth. Sandeep Deshpande: And my follow-up question is regarding about your microcontroller business, which is if you look at the Embedded Processing segment, it grew 1.2% year-on-year. I mean, many of your peers in this market are seeing better growth at this point. So why is ST growth in a key segment for ST lagging at this point or something else happening in that division? Jean-Marc Chery: So, embedded processing segment, clearly, the growth dynamic we have on the general purpose microcontroller is, let's say, at least consistent with our peers. Why it is a little bit offset? It is offset by our automotive microcontroller because, okay, up to now, our automotive microcontroller are more the microcontroller that will be, let's say, for some model of car moving to the software-defined vehicle architecture removed clearly. And I already explained that we have done a strong effort in 2025 to rework the road map of our micro, but this will be paid back, okay, more, let's say, end of '27 and '28. For the time being, yes, we suffer on the automotive microcontroller that is, let's say, optically offsetting the real good health of the general purpose. But the general purpose microcontroller, let's say, maybe I can share with you one number, okay, for Q1, the embedded processing solution segment will grow up low 30s. So above 30% year-over-year. So you can imagine that the growth of general purpose will be really, really strong more than, let's say, the secure microcontroller are growing a little bit less because driven by the market. And okay, of course, we have some offset linked to the automotive micro. But I can confirm to you that our general purpose microcontroller are performing or overperforming the market. Jerome Ramel: Mona, I think we have time for one more question. Operator: Next question comes from Sébastien Sztabowicz from Kepler Cheuvreux. Sébastien Sztabowicz: Coming back to the transformation program, have you made any specific progress so far? And notably on the manufacturing front? And are you still on track to reach your savings ambition for the end of '27? And the second one is more on the OpEx trend. So Q1, we know where it will stand. But for the full year, where do you see OpEx trending? And how do you see the start-up costs impacting the OpEx 2023? Do you plan to accelerate a little bit further the cost-cutting actions for OpEx? Lorenzo Grandi: In terms of our reshaping programs, I would say that is progressing in line with the expectation. In the course of 2025, the main, let's say, impact was related to the savings in our OpEx that indeed, when you look at the overall are declining, notwithstanding, let's say, the negative impact of the euro dollars. So at this stage in the course of 2026, as I said, we will start, let's say, progressively to transfer some activity from -- in silicon carbide to 8-inch in silicon to the 300-millimeter. As I was saying before, is now expected to yield the benefit in our manufacturing infrastructure efficiency of this program towards the second part of 2027 and 2028. So my short answer is, yes, we are on track in respect to what we have communicated previously. So, this is the situation. In respect to the expenses of 2026, now the expectation remains substantially the same, means that at the end, at this level of exchange rate, including the impact of the hedging, we should be able to stay with a net OpEx means including other income and expenses on a low single-digit increase, something in that range, mainly driven by the fact that we will have a reduction in other income and expenses in respect to the one of 2025 due to the phaseout cost because, of course, let's say, from the one side, we reduced the capacity in our manufacturing 6-inch, 8-inch. But on the other side, we have a progressive phaseout from these steps that will be reported in this line. It's a temporary effect, but it will be there during 2026. Jerome Ramel: Thank you, Sébastien, and thank you, everyone. I think this is ending our call for this quarter. So, thanks very much all of you for being there, and we remain here at your disposal should you need any follow-up questions. Thank you. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Dennis Shaffer: Good afternoon, ladies and gentlemen. Before we begin, I would like to remind you that this conference call may contain forward-looking statements with respect to the future performance and financial condition of Civista Bancshares, Inc. That involves risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures intended to supplement but not substitute the most directly comparable GAAP measures. The press release, also available on the company's website, contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures. This call will be recorded and made available on Civista Bancshares' website at www.civb.com. At the conclusion of Mr. Shaffer's remarks, he and the Civista management team will take any questions you may have. Now I will turn the call over to Mr. Shaffer. Dennis Shaffer: Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares, and I would like to welcome you to our fourth quarter and year-end 2025 earnings call. I'm joined today by Charles A. Parcher, EVP of the company and president of the bank, Ian Whinnem, SVP of the company and chief financial officer of the bank, and other members of our executive team. This morning, we reported net income for 2025 of $12.3 million or 61¢ per diluted share, which is consistent with our linked quarter and represents a $2.4 million or 24% increase over the fourth quarter in 2024. Included in the 2025 results were nonrecurring expenses related to our acquisition of Farmers Savings Bank that negatively impacted net income by $3.4 million on a pretax basis and $2.9 million on an after-tax basis, equating to 14¢ per common share. Going forward, we expect any additional expenses related to this transaction to be minimal. For the year, we reported net income of $46.2 million or $2.64 per diluted share, which compares to $31.7 million or $2.01 per diluted share for 2024. This is particularly impressive given that there are 2 million average additional shares outstanding as a result of our capital offering in July and our acquisition of Farmers Savings Bank in November. Taking into consideration the nonrecurring that occurred during 2025, our earnings per share for the year were reduced by $0.15. Backing out the nonrecurring fourth quarter expenses, our pre-provision net revenue increased by $6.7 million or 55% over the previous year's fourth quarter and by $2.2 million over our linked quarter. Our ROA for the quarter was 1.14% and excluding one-time expenses was 1.42%, continuing our string of improving our ROA for each quarter of 2025. For the year, our ROA was 1.11%. For the quarter, we were pleased to announce the closing of our transaction with Farmers Savings Bank, adding $106 million in loans and $236 million low-cost deposits to our balance sheet and are looking forward to a successful system conversion over the weekend of February. Our teams continue to work together towards the successful integration of our organization. Net interest income for the quarter totaled $36.5 million, which is a $1.9 million or 5.5% increase over the linked quarter and a $5.1 million or 6% increase over our fourth quarter in the previous year. During the quarter, our earning asset yield declined eight basis points while our funding costs declined 19 basis points. This resulted in the expansion of our net interest margin by 11 basis points to 3.69%. As we have discussed on previous calls, during 2025, we were focused on increasing our tangible common equity, reducing our CRE to risk-based capital ratio, and reducing our reliance on wholesale funding. To that end, we muted loan growth by keeping CRE loan rates somewhat elevated. The success of our July capital offering and the acquisition of Farmers Savings Bank have allowed us to become a little bit more aggressive in lending across our footprint. Excluding the newly acquired farmers' loans, our loan and lease portfolio grew $68.7 million, which represents an annualized growth rate of 8.7% during the fourth quarter. We anticipate mid-single-digit loan growth in 2026. For deposit funding continues to be a focus. And we were pleased that our nonbroker deposit funding, excluding deposits acquired through the Farmers Savings Bank transaction, grew organically by nearly $30 million during the quarter, allowing us to continue reducing our brokered funding. We believe this reduction in wholesale funding enhances the value of our core deposit franchise. Earlier this week, we announced an increase in our quarterly dividend to $0.18 per share, which represents a $0.01 increase over the prior quarter. Based on the December 31 closing market price of $22.22, this represents an annualized yield of 3.2% and a dividend payout ratio of nearly 30%. During the quarter, noninterest income increased $251,000 or 2.6% from our linked quarter and increased $869,000 or 9.6% from 2024. The primary drivers of the increase from our linked quarter were a $287,000 increase in interchange fees due to the typical elevated spending that comes during the holidays and a $380,000 increase in other fees related to leasing activity. These increases were partially offset by proceeds on a policy we received in the prior quarter and a $416,000 reduction in residual income from our leasing activity. As we have noted, leasing fees, particularly rent residual income, are less predictable than more traditional banking fees. For the year, noninterest income decreased by $3.8 million or 10% from 2024. This decline was primarily attributable to lease revenue and residual income. You will recall that we recognized a $1 million nonrecurring adjustment as part of our conversion to our new leasing system during the quarter. That, coupled with the overall decline in lease production this year, led to a reduction in lease-related revenues in 2025. We are confident the investments we have made in our leasing infrastructure this year will allow our leasing team to operate at a higher level in 2026. For the quarter, after adjusting for the $3.4 million in nonrecurring expenses related to the acquisition, noninterest expense was $27.6 million, which is consistent with the $27.7 million in our linked quarter after backing out $664,000 in nonrecurring farmers' expenses incurred in the third quarter. Year to date, after adjusting for the $3.8 million in nonrecurring expenses, noninterest expense decreased $2.4 million or 2.1% from our prior year. The primary drivers of this decline were a $3.1 million decline in compensation expense and a $1.4 million decline in equipment expense, which were partially offset by slight increases in a number of other expense categories. The decline in compensation expense was due to a slight reduction in FTEs, controlling overtime, and an increase in the amount of salaries and wages we defer related to loan origination. The decline in equipment expense was primarily the result of a decline in depreciation expense on leased equipment. This is the result of using residual value insurance to reduce depreciation expense related to operating leases. Our efficiency ratio for the quarter improved to 57.7% compared to 61.4% for the linked quarter and 68.3% for the prior year fourth quarter. Our effective tax rate was 16.8% for the quarter and 16.3% for the full year. Turning our focus to the balance sheet. As I mentioned, even after backing out the loans we acquired from Farmers Savings Bank, our lending team generated $68.7 million of organic net loan growth during the quarter, which is an annualized rate of 8.7%. While loans grew in nearly every category during the quarter, our most significant increase was a $90 million increase in residential real estate, which included the addition of $56 million in residential loans from Farmers. The loans we originate for our portfolio continue to be virtually all adjustable rate, and our leases all have maturities of five years or less. Although we were pleased with our success in bringing our CRE concentrations more in line with investor expectations, we will remain mindful of making sure we have the funding and capital to support future CRE growth. At December 31, our CRE to risk-based capital ratio was 275%. During the quarter, new and renewed commercial loans were originated at an average rate of 6.74%. Residential real estate loans were originated at 6.13%. And loans and leases originated by our leasing division at an average rate of 8.77%. Loans secured by office buildings make up only 4.5% of our total loan portfolio. As we have stated previously, these loans are not secured by high-rise metro office buildings. Rather, they are predominantly secured by single or two-story offices located outside of central business districts. Along with year-to-date loan production, our pipelines are strong, and our undrawn construction lines were $162 million at December 31. As previously mentioned, we anticipate our organic loan growth to be in the mid-single digits in 2026, as we leverage farmers' excess deposits and our loan pipeline to continue to build. On the funding side, we added $236.1 million in low-cost deposits from the Farmers transaction. In addition, we were able to continue our pattern of reducing broker deposits for the fourth consecutive quarter by nearly $30 million. Our continued focus on attracting and retaining lower-cost funding helped us lower our overall cost of funding by 19 basis points during the quarter to 2.08%. While we continue to see some migration from lower-rate demand accounts into higher-rate time deposits during the quarter, the addition of Farmers' lower-rate deposits allowed us to reduce our cost of deposits by four basis points to 1.59%. As shared during our last call, we launched our new digital deposit account opening platform during the third quarter, limiting online account opening to CDs. In the fourth quarter, we began offering online account opening for checking and money market accounts. In addition, we rolled out our deposit product redesign initiative. The goal of this initiative is to align our deposit product set with our new digital channels. We are seeing some success and look forward to launching a more comprehensive digital marketing campaign for online deposits once we get past the farmer's system conversion. Our deposit base continues to be fairly granular. Our average deposit account, excluding CDs, is approximately $28,000. At quarter end, our loan-to-deposit ratio was 94.3%, which is down slightly from our linked quarter. We anticipate maintaining this ratio within our targeted range of 90% to 95%. Other than the $464.4 million public funds with various municipalities across our footprint, we had no deposit concentrations at year-end. We believe our low-cost deposit franchise is one of Civista's most valuable characteristics, contributing significantly to our solid net interest margin and overall profitability. We view our security portfolio as a source of liquidity. At December 31, our security portfolio totaled $685 million, which represented 15.8% of our balance sheet and, when combined with our cash balances, represents 22% of our total deposit. At December 31, 100% of our securities were classified as available for sale and had $45 million of unrealized losses associated with them. This represents a decline in unrealized losses of $6 million for our linked quarter and a $17 million decline from 12/31/2024. So this is strong. Earnings continue to create capital. Our overall goal remains to maintain our capital at a level that supports organic and inorganic growth and allows for prudent investment into our company. We were happy to announce an 18¢ per share dividend earlier this week, which represents a penny per share increase in our quarterly dividend. We view this as a sign of confidence management and our board has in Civista's ability to continue generating strong earnings. We continue to operate with a $13.5 million repurchase authorization and a 10b5 share repurchase plan in place. While we have not repurchased any shares during the year, we believe our stock is a value and we will continue to evaluate repurchase opportunities. We ended the year with our tier one leverage ratio at 11.32%, which is deemed well-capitalized for regulatory purposes. Our tangible common equity ratio increased from 9.21% at September 30 to 9.54% at year-end on strong earnings. We feel this gives us capital to support organic growth and to invest in technology, people, and infrastructure. While economic conditions across the country remain mixed, the economy across Ohio and Southeastern Indiana is showing no systemic signs of deterioration. Our credit quality remains solid, and our credit metrics remain stable. Delinquencies remain low and are consistent with the prior year-end, while our net charge-offs were slightly lower in 2025 than the prior year. Our past due loans did increase $7 million during the quarter, and our nonperforming loans increased by $8.5 million to $31.3 million. Total nonperforming loans to total loans were 0.95%, up slightly from the linked quarter but down from the 1.06% at the end of 2024. The continued strong performance of our credits coupled with moderate loan growth resulted in a $585,000 provision for the quarter. Our ratio of allowance for credit losses to total loans is 1.28% at December 31, which is consistent with the 1.29% at 12/31/2024. And our allowance for credit losses to nonperforming loans is 135% at year-end, compared to 122% at 12/31/2024. In summary, our fourth quarter was an extension of what was a very productive and good year. Among the many initiatives we accomplished were a successful capital offering, the acquisition of Farmers Savings Bank, rolling out our new digital banking solution, and migrating to a new core lease system. All of which contributed to our achievement of two long-standing goals. We were able to increase our tangible common equity ratio from 6.43% a year ago to 9.54% at 12/31/2025. And reduced our CRE to risk-based capital ratio from 366% at the beginning of the year to 275% at year-end. These investments and efforts, coupled with our expanding net interest margin and controlling expenses, produced exceptional results as our full-year net income was $14.5 million or 46% higher than a year ago. Civista remains focused on creating shareholder value, serving our customers, and being a good corporate citizen in each of the communities that we serve. Thank you for your attention this afternoon and your investment. Now we'd be happy to address any questions you may have. Operator: Ladies and gentlemen, we will now begin the question and answer session. You will hear a prompt that your hand has been raised. If you would like to withdraw from the polling process, please press star and the number two. If you are using a speakerphone, please make sure to lift your handset before pressing any keys. Your first question comes from the line of Justin Crowley from Piper Sandler. Please go ahead. Justin Crowley: Hey, good afternoon, guys. Dennis Shaffer: Hi, Justin. Hello. Justin Crowley: Wanted to start out on the loan growth side of things. You know, some pretty decent growth in the quarter when you set aside farmers, and you mentioned the guidance for mid-single-digit growth looking out here. Just curious if you could talk a little more on how you think the complexion of that growth will take shape in terms of the split between commercial, where you talked about being a little bit more aggressive, and then on the residential side where you've seen some growth recently? Charles A. Parcher: Yeah. Justin, this is Chuck. I think we'll see kind of go back to more normalized growth in '26. Being that the commercial area will believe that growth book both C&I and commercial real estate. You know, we did have quite a bit of growth in '25 in the residential side. A lot of that due to we didn't really have a good outlet for our construction product and our CRA product, so we held most of those on the book. If we get a little bit of a blip downward in interest rates, we feel like we'll probably move some of that to the secondary market. It'll come up our balance sheet. So I would focus more so on commercial and C&I growth, as we normally do, and hopefully a little bit more leasing growth as well, but that'll be in the C&I bucket. Dennis Shaffer: And, Justin, I might just add that we don't want our funding to kind of keep pace with our loan growth. So we've been pretty successful in raising deposits over the last six, seven quarters. I think we've grown deposits six in the last seven quarters, but we kind of want to, you know, and those will those two things will kind of go hand in hand and we made some significant investments. Within some technology, particularly on the digital front, that we think will help us continue to raise deposits so that we can continue to fuel loan growth. Justin Crowley: And then, you know, I guess, you know, you mentioned it, but, you know, on that digital channel, depending on the success you see there and how much you can grow that platform, could that potentially get you beyond mid-single-digit growth? Or would it be that that digital channel is just gonna come at, you know, obviously, it's gonna be higher cost there. So you, of course, gotta think about the spread on new business. Just curious there. Charles A. Parcher: Right. I don't, you know, I don't think it substantially will jump that, you know, above that right now. I think, you know, again, we want to be mindful of our margin as well. So there's a number of factors that kind of play into that. But, you know, we just we'll be a little bit mindful of that. But we do think we have opportunities within our markets and stuff. Dennis Shaffer: And we are excited. I mean, I think we'll see accelerated growth through the digital side in '26. It's just it's gonna be hard to quantify until we get all of our products, you know, up and running on there. And to see the success that we have. Justin Crowley: Okay. Where is that digital channel now? Don't know you have the balances handy. And, you know, what kind of yields are we talking about there? Charles A. Parcher: Well, we don't have the balances handy, you know, right off the top. You know, we just you know, we're kind of in the infancy stages of that, but we are seeing some success. I mean, we've shifted from, you know, just offering CDs online with what we recently rolled it out. We wanted to make sure that we had, you know, things working and, you know, all our fraud prevention in place and stuff. And then now we've added checking and savings and money market accounts. And just last month, I mean, just adding just like you were we were surprised that we opened 28 new checking accounts last month on the through the digital front and stuff. So just think there's opportunity, but we'll try to give updates on balance as we go, maybe get further along in the year and stuff. Justin Crowley: Okay. Got it. And then, you know, maybe one on the NIM. Know, I've got the past few rate cuts, that'll continue to work their way through here. But you give us a sense for how the margin could trend through the year? You know, number one, I guess, if we get more of a pause out of the Fed, over the near or medium term, and then maybe square that to a scenario where, you know, we do eventually get a couple more cuts. Ian Whinnem: Hey, Justin. This is Ian. So right now, at say for the first quarter, we'd expect that margin to expand two to three basis points. And then into the second quarter and beyond, maybe another three to four and capping out around there. Justin Crowley: Okay. And, you know, that forecast that sort of assume a flat rate scenario, or what does that what's embedded there? Ian Whinnem: Right now, we're assuming a cut in June and then again in the fourth quarter. And if it stays flat, it'll be a little bit higher at the end of the year. Justin Crowley: Okay. And then maybe just one last one on expenses. Obviously, some noise with, you know, partial quarter of Farmers, but, you know, what's the best way to think about run rate, you know, certainly in the first quarter, but even just, you know, beyond that, considering the cost saves that'll come out of the acquisition once you get through conversion. Charles A. Parcher: Yeah. So we have now the expenses that we have in the first quarter, still gonna have the higher expenses for farmers running their core as well as some personnel until the conversion occurs in February. Following that, then we'll have a reduction in some expenses, but that won't occur until that third month of the first quarter. So what we're anticipating is first quarter expenses to be, you know, similar to where we are maybe in that '29 range, 29 to 29 and a half. For the first quarter expenses. In the second quarter, gonna have the merit increases that come in once per year for our colleagues. And that'll offset those reductions I mentioned a little bit ago. And we're making some good investments into our company. Yep. Yeah. We're using some of that capital we raised to invest back in the company too. So that's you know, we are buying, you know, investing in some technology, investing in some people, and some resources to continue to grow the franchise. Justin Crowley: Okay. Great. Very helpful. I appreciate it. Ian Whinnem: Thank you. Operator: Your next question comes from the line of Jeff Rulis from D. A. Davidson. Please go ahead. Jeff Rulis: Thanks. Good afternoon. Dennis Shaffer: Hi, Jeff. Jeff Rulis: Just a question on the credit side. It sounds like pretty steady state. You don't seem to I guess, tracking some of the linked quarter. The question being, was a lot of that acquired on the farmer side from the linked quarter increase? Mike Mulford: Jeff, this is Mike Mulford. No. The quality we brought over from FSP was very good. So that was not the reason for the increase. Jeff Rulis: What was that? If you could just in terms of We have one we have one credit that we had participation with another bank that we put on non-accrual in the fourth quarter. It was about $8 million. And so we work we're working with that lead bank to resolve that. But it was a case of, you know, it had been current. It matured. In November, so it did hit thirty days at year-end. But, again, we put it on non-accrual until we get the situation resolved. And Jeff, $8 million as Mike mentioned, the 8 and a half million dollar increase in the non-performing. So you know, it really was just that one quick credit. So we think it's somewhat, you know, an isolated instance. Jeff Rulis: Got it. The nonperformance actually were down from the year. On a percentage basis. Yep. We're okay. That sounds like that credit might have some, you know, potential for a more expedited resolution or don't wanna put words in your mouth, but you feel good about that. Moving through. Mike Mulford: Yeah. It's in the early stages. Again, we're working with the lead bank, and it did while it was not originated by us, we participated in it. It was a borrower that we had been familiar with and we had made loans to before. In the past. So again, we're working through it. I expect it'll the better part of twenty-six to work that out. And then even though we knew the good borrower, we have no other loans on the books. With that borrower. So and then, you know, just Jeff, we typically don't buy a lot of participations. We participate loans out, but typically have not been a bank that's bought a lot of participations just because we have such strong organic and such strong demand within our markets. So most of how we grow our portfolio is organically. Jeff Rulis: Got it. And just a follow on on the margin. Three sixty-nine, just trying to get what proportion of accretion assumptions, we're looking at kind of inching up from here? Any unpacking the core versus accretion? Ian Whinnem: Yeah. So within the fourth quarter, the accretion's gonna be in there for two full months. Of the three of the three month quarter. When we think in terms of the dollar impact, it's pretty minimal. It's an immaterial acquisition for the most part. Jeff Rulis: Okay. Alright. Thanks. Last one. Apologize. The tax rate is something in the mid-sixteens. Is that a level you'd subscribe to? Ian Whinnem: Correct. Yeah. We're anticipating 16 and a half for 2027. Jeff Rulis: Right. Thank you. Ian Whinnem: I sent that for at least 69 for 2026. My apologies. Operator: If you'd like to ask a question, please. Your next question comes from the line of Terry McEvoy from Stephens. Please go ahead. Terry McEvoy: Hi, Terry. Hey, Terry. Hi, Terry. Guys. Good afternoon. Could you just talk about new commercial loan yields and maybe just comment on loan spreads and overall competition there? Charles A. Parcher: Well, Ohio is still pretty competitive. Ohio and Indiana, I should say, is still relatively competitive. I think we put last December's new and renewed came on at $6.73. I would tell you some of the larger deals are coming in a little bit less than that. I would say the good deals are probably coming in six and a quarter, six and a half right now. But it's been relatively consistent. You know, the five-year treasury has been relatively constant here over the last sixty to ninety days. And you know, that margin is still coming in, you know, relatively $2.75, give or take, over the five-year. We do have some loans repricing in the first quarter and throughout the remainder of the year, Chuck, you wanna share that with. We're just bringing that for based on the twelve thirty-one year-end, we've got about $225 million of credit that we put on, you know, three or five-year adjustables. And they will reprice throughout 2026. And those rates, give or take, I would say, are coming off $4.75. And probably come back in the, you know, probably pick up. Point and a half on most of those. Terry McEvoy: That's helpful. Thank you. And then you've got a large a couple large Ohio banks focused elsewhere. Detroit's, I'm gonna guess, what, a 100 miles from Sandusky, which is another market going through some disruption. So how are you thinking about maybe playing some offense in 2026 given that backdrop, and could it impact your expenses if hiring picks up? Charles A. Parcher: We feel good about it, Terry. I mean, we've already we've hired think we've got three new lenders coming on here beginning of the year. Now they were replacements or filling slots of people that got elevated within our organization. We got another couple people coming on at the end of the first quarter waiting to get their bonuses at their shops. So we feel good about where the talent's coming from. We're picking some up from banks that, to be honest with you, have either been that are either being acquired or already have been. You know, the obviously, the West Bank of Premier one was a big one that was last year, and we've got some talent, you know, from there. You know, Ian most of Ian's treasury area finance area came from Premier. And we feel really good about the disruptions. We're not only getting calls from those employees at those institutions, but we're also getting calls from the clients of those institutions as they go start to go through the changes. So we feel like we've got a lot of opportunity just because of the disruption. Dennis Shaffer: Yeah. And that expense rate we and I mentioned earlier, does include some of those additions. Terry, should be that some of the investments we're making back into the company on the people side. Terry McEvoy: Right. Thanks for taking my questions. Have a good day. Charles A. Parcher: Thanks, Terry. Thanks. Operator: Your last question is from the line of Timothy Switzer from KBW. Please go ahead. Timothy Switzer: Hey, good afternoon. Thanks for taking my question. Dennis Shaffer: Hey, Tim. Hi, Tim. Timothy Switzer: I apologize if any of this has already been covered. But the first question I have is, with regards to the capital stack, you guys are pretty healthy capital levels. Close to Farmers. You know, are there any is there any, like, optimization you need to make now that you've closed that deal? And then, you know, what are your thoughts on share repurchases going forward? Know historically, you guys have said you know, you think it's a good value at these prices. Dennis Shaffer: Yeah. Yeah. We still think we're a value, so we continue to we didn't repurchase anything last year, but we do have our 13 and a half million dollar authorization in place. We have them, you know, we're set up there. And as long as we feel we're you know, there's some value there, we certainly will consider. We think that's a good way to deploy capital. But we kind of evaluate we've been in a blackout we weren't able to purchase that. Through the acquisition. So we continue to evaluate that and as long as we continue to have strong earnings, that's definitely a part of our capital stack. So, you know, we're always looking for ways to maximize our capital. Timothy Switzer: Got it. Okay. And I assume most everything on guidance has been covered by this point, but can you maybe discuss what you guys are seeing for leasing revenue next year? It's just always kind of a tougher item to model. Ian Whinnem: Yeah. So I can speak to that and are you talking about the noninterest income side of it there? Timothy Switzer: Exactly. Ian Whinnem: Yeah. So it is a little lumpy, and so within the fourth quarter, we did have a lease disposal gain that came in. It was about a half million dollars, about 500,000. So when we think in terms of the guidance, within the fourth quarter, we have a Mastercard annual volume bonus that we get. Of about $250,000 that comes in each year. We have those security gains which is about a $120,000. And then that first quarter, usually, we see a little bit of a slowdown. On the mortgage gain on sale as well as the leasing gain on sale. So you know, we expect that leasing revenue to drop off on the gain on sale. And maybe a little bit slower on the traditional leasing revenue. But total noninterest income, we probably guide you towards maybe $7.08 to $8.02. For the first quarter. And then increasing from there to the second quarter, maybe another half million. Timothy Switzer: Okay. Alright. That's all for me. Thank you, guys. Dennis Shaffer: Thanks, Tim. Operator: There are no further questions at this time. I would like to turn the call back to Mr. Dennis Shaffer for closing comments. Sir, please go ahead. Dennis Shaffer: Thank you. Well, in closing, I just want to thank everyone for joining today's call. And for your investment in Civista. Our quarter and our year-end results were due in large part to the hard work and the discipline of our team. I remain confident that this quarter and this year's list of accomplishments are strong financial results, our disciplined approach to managing. So this positions us very well. For long-term future success. And just look forward to talking to everyone in a few months to share our first quarter results. So thank you for your time today. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.
Operator: Hello, everyone. Thank you for standing by, and welcome to Southside Bancshares' Fourth Quarter and Year End 2025 Earnings Call. [Operator Instructions] I will now hand the call over to Lindsey Bailes, VP. Lindsey Bailes: Thank you, Alexandra. Good morning, everyone, and welcome to Southside Bancshares' Fourth Quarter and Year-end 2025 Earnings Call. A transcript of today's call will be posted on southside.com under Investor Relations. During today's call and in other disclosures and presentations, I'll remind you forward-looking statements are subject to risks and uncertainties. Factors that could materially change our current forward-looking assumptions are described in our earnings release in our Form 10-K. Joining me today are President and CEO, Keith Donahoe; and CFO, Julie Shamburger. First, Keith will start us off with his comments on the quarter and then Julie will give an overview of our financial results. I will now turn the call over to Keith. Keith Donahoe: Thank you, Lindsey, and welcome to today's call. Early in the fourth quarter, market conditions allowed us to continue the partial restructuring of our available-for-sale securities by selling approximately $82 million of lower-yielding long-duration municipal securities with a combined taxable equivalent yield of 2.6% and generating a $7.3 million net loss. All sales were completed at the end of October with net proceeds together with additional portfolio cash flows and a $49.7 million sale of a T-bill reinvested in various low premium, primarily 5.5% coupon agency MBS with an average yield of $536 similar to the third quarter security sales, we believe the fourth quarter sales enhances future net interest income while providing additional balance sheet flexibility as we grow. We estimate the payback on the third quarter security sales to be less than 3.5 years. Overall, we experienced a million linked quarter increase in net interest income, resulting primarily from lower funding costs and moderate loan growth. Our net interest margin expanded to 2.98% and we expect additional net interest margin expansion resulting from the redemption of approximately $93 million of supported debt on February 15, 2026 . The fourth quarter new loan production totaled approximately $327 million compared to third quarter production of approximately $500 million. Of the new loan production $25 million funded during the quarter with the unfunded portion of this quarter's production expected to fund over the next 6 to 9 quarters. Excluding regular amortization and line of credit activity, fourth quarter payoffs totaled approximately $164 million. While higher than the third quarter payoffs of $117 million, it was the second lowest quarter for payoffs during 2025. Third quarter CRE payoffs included 28 loans secured by industrial, retail and multifamily, medical office, general office and commercial land. Most of these were concentrated in 5 industrial properties and 8 retail properties. Outside of CRE payoffs, we did exit a C&I participation during the quarter due to pricing well below our comfort zone our loan pipeline dipped to $1.5 billion mid-quarter, but rebounded after the first of the year to just over $2 billion today. The pipeline is well balanced with approximately 42% term loans and 58% construction or commercial lines of credit. This mix is unchanged from the third quarter. C&I-related opportunities represent approximately 20% of today's total pipeline, and that's down slightly from third quarter's 22%. Credit quality remains strong during the fourth quarter, nonperforming assets increased $2.6 million, primarily related to a $2.4 million loan secured by a small residential condo project. but remain concentrated in the previously disclosed $27.5 million multifamily loan we moved into the nonperforming category during the first quarter of despite this loan not paying off in the fourth quarter, we remain optimistic that the borrower will finalize their refinance within the next 2 weeks. As a percentage of total assets, nonperforming assets remained low at 0.45% when considering our net income, earnings per share and other financial results, excluding the onetime loss on the sale of securities, we had an excellent quarter. Overall, the markets we serve remain healthy, and the Texas economy is anticipated to grow at a faster pace than the overall projected U.S. growth rate. With that, I'll turn the call over to Julie. Julie Shamburger: Thank you, Keith. Good morning, everyone, and welcome to our fourth quarter and year-end call. For the fourth quarter, we were pleased to report net income of $21 million, an increase of $16.1 million or 327.2 and Diluted earnings per share were $0.70 for the fourth quarter, an increase of $0.54 per share linked quarter. We reported net income of $69.2 million for 2025, a decrease of $19.3 million or 21.8% and and diluted earnings per share of $2.29 compared to $2.91 for 2024. The decrease was driven by the restructuring of the AFS securities portfolio. As of December 31, loans were $4.82 billion, a linked quarter increase of $52.7 million or 1.1%. The linked quarter increase was driven by an increase of $29 million in construction loans, $24.1 million in commercial real estate loans and $14.8 million in commercial loans, partially offset by decreases of $6.2 $6 million in municipal loans and $5.7 million in 1 to 4 family residential loans. The average rate of loans spend during the fourth quarter was approximately 6.6%. As of December 31, our loans with oil and gas industry exposure were $71 million or 1.5% of total loans compared to $70.6 million or 1.5% linked quarter. Nonperforming assets remained low at 0.45% of total assets as of year-end. Our allowance for credit losses decreased to $48.3 million for the linked quarter from $48.5 million on September 30. And Linked quarter, our allowance for loan losses as a percentage of total loans decreased 1 basis point to 0.94% at December 31. During the fourth quarter, we continued restructuring a portion of our AFS securities portfolio that included sales of approximately $82 million of lower-yielding longer-duration municipal securities. Purchases of $373 million, primarily mortgage-backed securities occurred during the fourth quarter to replace securities sold during the restructuring of the AFS portfolio during the third and fourth quarters. The purchases more than offset sales maturity and principal payments, resulting in an increase in the securities portfolio of $147.9 million or 5.8% to $2.70 billion at December 31 when compared to $2.56 billion on September 30. The increase for the linked quarter brought the total securities portfolio to a level consistent with the first and second quarters of 2025. As of December 31, we had a net unrealized loss in the AFS securities portfolio of $767,000, a decrease of $14.7 million compared to $15.4 million last quarter. The improvement occurred primarily due to the restructuring of the AFS portfolio and an improvement in the remaining AFS portfolio. There were no transfers of AFS securities during the fourth quarter. On December 31, the unrealized gain on the fair value hedges on municipal and mortgage-backed securities was approximately $788,000 compared to $905,000 linked quarter. This unrealized gain more than offset the unrealized losses in the AFS securities portfolio. As of December 31, the duration of the total securities portfolio was 7.6 years compared with 8.7 years at September 30 and the duration of the AFS portfolio was 4.8 years compared to 6.5 years on September 30. At quarter end, our mix of loans and securities was 64% and 36%, respectively. The slight shift compared to 65% and 35%, respectively, last quarter. Deposits decreased $96.4 million or 1.4% on a linked-quarter basis due to a decrease in broker deposits of $233.5 million partially offset by an increase of $40.8 million in retail deposits and an increase of $86.3 million in public some deposits. On February 15, we will redeem our $93 million of subordinated notes due in 2030. The rate on the note adjusted during the fourth quarter to a floating rate of 7.1%, our capital ratios remained strong with all capital ratios well above the threshold for well capitalized. Liquidity resources remained solid with $2.78 billion in liquidity lines available as of December 31. And and repurchased 369,804 shares of our common stock at an average price of $28.94 during the fourth quarter. There have been no purchases of our common stock since December 31, and we have approximately 762,000 shares remaining authorized for repurchase. Our tax equivalent net interest margin was 2.98%, an increase of 4 basis points on a linked-quarter basis, up from 2.4% at the end of the quarter. Our tax equivalent net interest spread for the same period was 2.31%, an increase of 5 basis points from 2.26% the increase in the net interest margin and net interest spread is primarily due to lower funding costs. For the 3 months ended December 31, we had an increase in net interest income of $1.5 million or 2.7% compared to the linked quarter. Noninterest income, excluding the net loss on the sale of AFS securities increased 4, or 4% for the linked quarter, primarily due to an increase in deposit services, billing income and brokerage services income partially offset by a decrease in other noninterest income. Other noninterest income decreased primarily due to a decrease in swap fee income. Noninterest expense was $37.5 million for the fourth quarter, consistent with the last quarter with a slight decrease of $57,000. Our fully taxable equivalent efficiency ratio decreased to 52.28% as of December 31 from $52.99 as of September 30, primarily due to an increase in total revenue. We have budgeted a 7% increase in noninterest expense in 2026 over 2025 actual primarily related to salary and employment benefits, software expense, professional fees, retirement expense and a onetime charge of approximately $800,000 and in connection with the redemption of the subordinated notes on February 15. During 2025, we budgeted for several software initiatives that did not materialize, and we have allocated those into the 2026 budget. For the first quarter of 2026, we anticipate noninterest expense of approximately $39.5 million. We recorded income tax expense of $3.8 million compared to $189,000 in the prior quarter, an increase of $3.6 million, driven by the loss on sales of AFS securities in the third quarter. Our effective tax rate was 15.3% for the fourth quarter, an increase compared to 3.7% last quarter. And we are currently estimating an annual effective tax rate of 17.4% for 2026. Thank you for joining us today. This concludes our comments, and we will open the line for your questions. Operator: [Operator Instructions] Your first question comes from the line of Woody Lay with KBW. Wood Lay: Then I believe you just called out expense growth is what you're budgeting in 2026. I was just hoping to get a little more detail and exactly how much of the incremental expense build is related to these software projects? And could you also talk about the hiring strategy and how that's built into the budget? Keith Donahoe: Yes. I'll hit at a high level and Julie can provide some details. So I don't have the breakdown in front of me on the bench between software and FTEs. But what's going -- what's really happening is on the software front, we are looking at moving our core out link. And so we're currently hosting it on-premise, and we're going to take it off premise. In the long run, we anticipate that to create some efficiencies for us. as we move into expanded growth mode and/or if we make an acquisition that's going to make that more efficient prospect for us. So that's part of it. We're also starting an initiative to build out a data platform which we do believe will give us over time, much more insight into the raw data that we have in multiple systems right now. So those are the 2 biggest components of the software spend from an FTE standpoint, some of this is we hope will make us more efficient in the long run as well because we are changing some of our processes within the loan origination group. And we are kind of where everybody is in right now. We're pumping high volume of loan grocer system that probably wasn't ready for it yet. So we are making some personnel changes and shifting people around, which means also adding some staff in certain situations. So that's bulk of what we're doing, Julie, if you've got any additional detail? Julie Shamburger: I was just going to point out on the FTEs, since December 23, our FTEs have been down about 6% actual number of FTEs. So that speaks somewhat to Keith's comments about adding some staff. Also as far as the numbers in the software and data processing, we've got about $2.3 million, $2.4 million additional in the budget over 2025 spend. So I don't know if that answers your question, Wood, the software and data processing, which is where combined how it's reported in our -- all of our filings in the 10-Q and 10-Ks and earnings. Wood Lay: Got it. That's really helpful color. I appreciate that. Maybe a follow-up. You mentioned working. Julie Shamburger: I was just going to say that the $39.5 million that I forecasted, if you will, for the first quarter doesn't reflect the full 7% as these are not all day 1 increases. We expect them to come in over the course of the year. So I just wanted to add that color as well. Wood Lay: Yes. Appreciate that. And maybe a follow-up, you mentioned the core switch might help with M&A down the road. And just wanted to get your thoughts on just given the deal activity we've seen recently in Texas, how you are thinking about M&A for sell side in the current environment? Keith Donahoe: Yes. It's still part of the strategy. we are open to discussions. Again, as I've told a lot of folks, we're not going to acquire just to acquire. We're going to be strategic. If it's filling out a geography for us, and/or picking up. We've got -- as an example, we've got only a loan production office in Dallas, if we can find the right target in Dallas, that would be a good expansion for us because it would help us fill out the Metroplex. Same thing in Houston, we've got effectively a loan production office. We are opening a new retail location in the Woodlands and which should be opening in the next 60 days. But it's those target areas. And even in Austin with only 2 locations. If the right opportunity comes around, we are discussing those situations and are open to it. I hope that helps. Wood Lay: Yes, that definitely does. All right. That's all for me. Operator: Your next question comes from the line of Michael Rose with RJ. Michael Rose: Maybe we can just start on the margin. Obviously, the balance sheet restructuring on the securities restructuring was smaller this quarter than than last, but you are going to redeem the sub debt that you mentioned. Just with those puts and takes in the loan pricing competition, things like that, can you just give us some expectations on maybe what the first quarter margin could look like? Keith Donahoe: Yes. It's going to be positive, although it will be muted. I think we'll see a bigger pickup as we move through the rest of the year. We do have a onetime charge coming in the first quarter for the redemption. But directionally, it's going to be positive, but -- and pick up towards the end of the year. Julie Shamburger: From the standpoint of the sub debt, it repriced in the middle of the fourth quarter, and it's going to go away in the middle of the first quarter. So strictly with respect to the $93 million, it's going to have about the same impact in the first quarter as it did in the fourth. But when those sources of funding are replaced in the second quarter, we'll certainly see we expect for sure to see some improvement just with respect to that 1 piece of funding, if that makes sense. Michael Rose: Okay. Yes. Thanks for the clarification, Julie. I appreciate it. And then maybe as we just think about loan growth, I appreciate the comments at the beginning of the call just around some of the production and paydown activity. I know paydowns are really difficult to forecast. But just given some of the investments that you've made in people and opening up new locations over the past few years. Should we think about a higher level of production, it seems like the environment is pretty conducive for loan growth here. Just wanted to get a sense for how we should kind of think about at least on the production side as we move through the year. Keith Donahoe: Yes. From a production standpoint, I anticipate us to probably exceed 25%, but we do have a large number of payoffs that are in our forecast, some of which are these construction projects that have stayed on our books longer than what they normally would as these projects are finished and stabilized occupancy comes around and so we've got a high number of those maturities happening this year. So we anticipate some of those moving out into the permanent market and/or sales. So those are some of the headwinds that we're still facing I'm excited because I was a little concerned that the pipeline dropped to $1.5 billion in the middle of the fourth quarter but we have rebounded strongly, and we're back up over $2 billion now. Over half of that pipeline is in the very early stages, which means it hasn't run through our credit screening process, but they're starting to move through. But we do have a significant number in the closing process right now. So I would love to tell you, I'm super optimistic that we may beat our numbers, but that right now, it's too early in the year to make that call. But we are very active across all of the markets and I do anticipate it being a good year for us on the loan growth side. Michael Rose: I appreciate it, Keith. And maybe just one final one for me. obviously, the buyback stepped up a little bit this quarter. The restructuring is also a little bit smaller than the third quarter as well. But how should we think about kind of the pace of buybacks from here? You guys will have decent capital accretion as we kind of move through the year, stock is still relatively attractive on a tangible basis. Just wanted to get your thoughts, updated thoughts on the buyback. Keith Donahoe: Yes. I think from a -- just a strategic standpoint, we're going to continue to be opportunistic with it. What may impact that is if there is an acquisition in the future. But at the same time, those are probably -- when you look at capital strategy, those are -- first, we've got the sub debt retirement is obviously the #1 capital strategy. close behind that is stock buyback and then M&A. So we're -- all of that's going to work together, but -- and 1 of them may impact the other one, but we'll see how that goes this year. Michael Rose: All right. I'll step back. Operator: Your next question comes from the line of Brett Rabatin with Hovde. Brett Rabatin: Julie wanted to start off on just the fee income outlook from here. And it seems like brokerage has had some pretty good trends. I was just curious if there were any drivers that you were specifically thinking about the '26 in terms of fee revenues? And then just any thoughts on the outlook for 2026? Julie Shamburger: Sure, Michael -- Brad, sorry, I'll take that one. We are expecting an increase in -- a pretty nice increase in our fee income. We've put in our budget about $1.5 million for an increase. That's what we're budgeting. And a lot of it does come -- most of that does come in the trust income fees. We've -- I think we told you on the last couple of quarters that we have picked up some additional talent in that area, and we've built up a really strong team that we're excited about. And even looking to to increase that team into the Fort Worth North Texas area. Right now, it's pretty much -- well, it is completely in East Texas and Southeast Texas areas of our market areas, but we are looking to increase it in the North Texas area. So we have budgeted additional fees there. And looking for some additional increase in just treasury fees and as well in the brokerage services because we have seen some nice pickup in those 2 areas over the last year. And that's where most of the increase is coming from. Brett Rabatin: Okay. That's helpful, Julie. And then I wanted to just go back to the securities portfolio and just -- are all the actions that you guys have anticipated played out from here? Is there anything else that you might want to do? Or is basically anything from here would be more opportunistic relative to rates changing? Keith Donahoe: Yes. For us, we're going to continue to be opportunistic with it. And we're sitting here today, rates aren't in the right position for us to continue to make moves, if they do, and we're watching -- it's a daily process for us. And so if we're seeing the right signs, we will make those moves. But right now, we're in a holding pattern, if you will. Brett Rabatin: Okay. And then maybe lastly, just -- you've talked a little bit about it on hirings. There's been quite a bit of M&A activity in Texas was just curious, Keith, any thoughts on that disruption, if that's an opportunity for you maybe in the Dallas market, Fort Worth market, with either people or clients? Is there anything that you're specifically targeting related to disruption? Keith Donahoe: Yes. We're seeing opportunity both from a people -- on the people side as well as customer side. We've been working on a couple of C&I opportunities in the Metroplex that are sort of being disrupted because of the acquisitions we're seeing Obviously, the transaction that was announced yesterday in Houston, I think we could see some activity out of that, but it's too early to tell that we have our antenna up, and we are looking and we'll be looking for both customer displacement as well as employee displacement. So yes, we're active in that and we'll continue to be so. Brett Rabatin: Okay. Great, for the color. Operator: Your next question comes from the line of Jordan Ghent with Stephens. Jordan Ghent: I just wanted to ask a question on M&A, kind of going back to that. How do you guys think about that as far as the target asset size and especially in relation to crossing $10 billion? Keith Donahoe: Yes. I mean it still remains that we aren't going to buy something in the $2 billion category. We would be below 1 -- I mean, 1.5 roughly. But if there's an opportunity that can spring us over that in a significant way, we will look at that as well. But as you know, in the state of Texas when you start getting into the $3 billion to $5 billion range, those are fewer. So there's more opportunities in the lower than $2 billion market. And we're looking and if we can get one down that gets us close, and that helps us get to the point that we can spring over 10 with the second transaction. So we're -- it's a little bit of puzzle will put together, but we are looking at opportunities and continue down the same strategy that we've had in the last couple of years on that topic. Jordan Ghent: Okay. And then maybe just one follow-up question for Julie on the operating expense for that 1Q 26 number, the 39.5%, does that include that onetime charge? Or is that excluding that onetime charge of $800,000. Julie Shamburger: Yes, Jordan, it will include it. Operator: There are no further questions at this time. I will now turn the call back to Keith Donahoe, President and CEO, for closing remarks. Keith Donahoe: Thank you, everyone, for joining us today. We appreciate your interest in Southside Bancshares and the opportunity to answer your questions. We're optimistic about 2026 and look forward to reporting first quarter results during our next earnings call in April. Thank you. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Greetings and welcome to the Five Point Holdings' Fourth Quarter and Year-End 2025 Conference Call. As a reminder, this call is being recorded. Today's call may include forward-looking statements regarding Five Point's business, financial condition, operations, cash flow, strategy, acquisitions and prospects. Forward-looking statements represent Five Point's estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could affect future results and may cause Five Point's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described in today's press release and Five Point's SEC filings, including those in the Risk Factors section of Five Point's most recent annual report on Form 10-K filed with the SEC. Please note that Five Point assumes no obligation to update any forward-looking statements. Now I would like to turn over the call to Dan Hedigan, President and Chief Executive Officer. Daniel Hedigan: Thank you, Vaughn. Good afternoon, and thank you for joining our call. I have with me today, Kim Tobler, our Chief Financial Officer; and Leo Kij, our Senior Vice President of Finance and Reporting. Stuart Miller, our Executive Chairman; and Mike Alvarado, our Chief Operating Officer and Chief Legal Officer, are joining us remotely. On today's call, I will review our fourth quarter and full year 2025 results, which marked another important milestone for Five Point. I'll discuss our operational progress during the year, highlight several major accomplishments across our communities and outline our strategic priorities as we move into 2026. Ken will then walk through our financial results in more detail and review our outlook. We'll open the line for questions following our prepared remarks. Turning first to our results. I'm very pleased to report that 2025 was another record year for Five Point despite challenging market conditions. In the fourth quarter, we generated $58.7 million in net income, resulting in annual consolidated net income of $183.5 million, exceeding our prior record set in 2024. Our net income for the year exceeded the revised guidance we issued in Q2 2025 by roughly $6 million, reflecting our team's expertise and consistent execution across our platform, disciplined capital management and continued pricing strength at the Great Park. Beyond our strong financial results, we also obtained critical entitlement approvals during the fourth quarter at both Valencia and the Great Park. I'll provide additional detail later in the community updates. These entitlements will enhance our near-term cash flows by creating a foundation for the company's future development. It goes without saying that we could not have hit these operational and financial milestones over the past few years without the dedicated and focused efforts of our small and efficient hard-working team. During the 3 months ended December 31, 2025, we were able to close meaningful land sales of both of our active communities. In Valencia, we closed an industrial land sale consisting of 13.8 acres for a purchase price of $42.5 million. At the Great Park, the venture closed 3 new home programs with 187 homesites on 19.7 acres for an aggregate base purchase price of $181.5 million. As a result of Great Park operations during the quarter, we received $73.6 million in distributions and incentive compensation payments from the Great Park Venture. Let me now talk about the market. 2025 unfolded against the housing market that remained challenging, shaped by economic uncertainty, elevated interest rates and affordability constraints. Even so, our results underscore the resilience of our assets, which in part derived from the consequences of operating in supply-constrained California markets. At the Great Park, homebuyer and builder demand remained strong throughout the year, allowing us to close the sales on 13 different programs consisting of 920 homesites while maintaining -- while also maintaining pricing discipline. In Valencia, although home sales volumes were more modest and we like to delay residential land sales to our guest builders, the long-term value of the asset was significantly enhanced by securing major entitlement approvals that will support the next phase of our residential and industrial development activity. As a number of public homebuilders have recently noted, homebuyer demand nationally has continued to be tempered by ongoing affordability headwinds. We have seen this impact more in Valencia than in the Great Park, but we believe that demand will continue to be supported by the persistent undersupply of housing in our core markets. As we look ahead, we expect that despite intermittent challenges from interest rates or other factors that affect consumer sentiment, we should see growing buyer confidence and moderating interest rates translate into improving demand for well-located homesites. Against this backdrop, in 2025, we significantly strengthened our company. From a financial perspective, during the year, we materially enhanced our balance sheet and capital structure. We refinanced our senior notes, issuing $450 million of 8% notes due October 2030 and repaying another $75 million, which will reduce our annual interest expense by approximately $20 million. Since January 2024, we have paid down a total of $175 million in debt. Additionally, we expanded and extended our revolving credit facility to $217.5 million with a new maturity of July 2029. These actions greatly reduced our near-term refinancing risk while preserving substantial liquidity. We ended the year with cash of $425 million and total liquidity of $643 million. Importantly, our balance sheet and liquidity provide us with exceptional flexibility around capital allocation, including the ability to engage growth opportunities, which I will discuss later, as well as the ability to potentially return capital to shareholders over time. To be clear, however, our first priority is to pursue our growth strategy as we seek to expand recurring revenues. From an operating standpoint, 2025 was defined by securing critical entitlement approvals in Valencia and the Great Park, steady demand at the Great Park, continued progress on land development activities for the next phase of infrastructure at Candlestick and the successful closing and integration of the Hearthstone land banking platform, which added a pivotal new earnings stream to our business. Before turning to community updates, I want to briefly review our operating and growth strategy, which continues to guide our decision-making. Our strategy rests on 4 core pillars. First, maximizing the value of our existing communities. This means aligning land sales with builder demand, pacing development appropriately and maintaining the flexibility to be patient when market conditions warrant it. Second, maintaining a lean operating structure. Even as we've grown earnings and expanded our platform, we remain disciplined in managing overhead and fixed costs. Third, matching development spending with revenue generation, ensuring capital is deployed efficiently and not too far in advance of monetization. And fourth, expanding our platform through targeted growth initiatives, most recently through the addition of Hearthstone and its short-term land banking business. Let me now provide you with some updates on our communities, starting first with the Great Park Neighborhoods. During the fourth quarter, builders in our Great Park community sold 78 homes versus 187 in Q3. This decrease in sales is primarily attributable to seasonality and reduction in available home supply as existing collections sold out. We currently have 12 actively selling programs in the Great Park Neighborhoods with 8 additional programs planned to open later this year. These current and upcoming programs will ensure our guest builders can continue delivering a wide variety of housing options throughout Great Park Neighborhoods. During the year, we closed multiple large residential land sales, many of which incorporated price participation structures designed to balance near-term certainty with long-term upside. The 3 programs we closed in the fourth quarter utilized this price participation model. An average base purchase price for these fourth quarter sales was $9.2 million per acre before taking into account potential price participation. These transactions spoke for our ability to adapt structure without sacrificing value. We currently are in the bidding process with builders for 4 new residential programs totaling approximately 27 acres. We expect to complete the bidding process and close these land sales by the end of this year. Importantly, we also received approval from the City Council for new entitlements that will allow us to convert approximately 100 acres of commercial land into additional market rate homesites, further advancing the value of this community. Next, I'll move to Valencia, our other active community. Valencia is still in the early stages of its development and has many future phases of land delivery ahead of it, which will enable us to provide much-needed housing in the Los Angeles market. Home sales showed improvement during the quarter as our guest builders sold 70 new homes versus 50 in Q3. During the fourth quarter, 2 programs sold out in Valencia, and we now have 10 builder programs open and actively selling. Additionally, we anticipate 6 new programs will open during 2026, offering prospective homebuyers additional home product options. As I mentioned, we closed our first significant industrial land sale in over 15 years at Valencia during the fourth quarter, consisting of 13.8 acres for a purchase price of $42.5 million. In order to optimize land values, we elected to delay residential land sales in 2025. We are currently talking to our guest builders about potential land sales in 2026. Although we did not complete any residential land sales, 2025 was a transformational year for Valencia as we received unanimous approval from Los Angeles County Board of Supervisors for the Entrada South and Valencia Commerce Center entitlements. Like California and Valencia, in particular, have a long history of land use litigation, challenging new housing projects, which unfortunately, we've had to build into our business planning, we're happy to report that no litigation was filed to challenge the approval of these communities, an outcome that will allow us to accelerate our development time line. Entrada South is expected to consist of approximately 120 net acres of residential land, over 1,300 market rate homesites and approximately 40 net acres of commercial land, while Valencia Commerce Center is expected to include approximately 110 net acres and will cater towards industrial-focused uses. We're also pursuing approvals for 3 additional villages. When approved, these villages, combined with existing entitlements will provide over 10,000en titled homesites, creating a deep pipeline for future land sales to help meet demand in the county's chronically undersupplied housing market. These approvals will substantially enhance the long-term value of Valencia and will position it to become an increasingly meaningful contributor to our results. Turning to San Francisco. We're finalizing engineering for the next phase of infrastructure and we're working with local agencies and ministerial infrastructure permits for the initial site work. We still expect to begin this initial site work at Candlestick in the first half of 2026. Now let me discuss Hearthstone. We closed the acquisition in Q3 of 2025 and the Five Point and Hearthstone teams hit the ground running. I want to reiterate how excited we are to have this incredible talented and experienced group from Hearthstone as part of Five Point. At closing, Hearthstone had approximately $2.6 billion of assets under management and that figure has since grown to approximately $3.4 billion. Additionally, we anticipate securing $300 million to $500 million of newly originated capital commitments in the first quarter. In 2025, Hearthstone contributed $11.8 million of management fee revenue and $3.5 million of net income to Five Point's consolidated results. Beyond the near-term financial contribution, Hearthstone considerably expands our relationship with institutional capital partners and builders and provides a scalable platform for fee-based earnings growth. With Hearthstone, Five Point now participates in both long-duration master planned community development and shorter duration land banking, creating a more balanced and diversified earnings profile. Now that we are well into the process of integrating Hearthstone, we're exploring additional revenue growth options available to Five Point. We're currently evaluating middle duration opportunities in the land ecosystem in order to grow a durable platform for the future. While I can't provide further information at this juncture, our management team is focused on leveraging our experience, balance sheet and capital relationships to pursue opportunities utilizing outside capital partners to create additional fee-based revenue streams using an asset-light approach. We expect to have more to report on these initiatives on future calls. Before I wrap up, let me provide an outlook for 2026. Based on what we have seen today, we expect consolidated net income in 2026 to be approximately $100 million. We expect our earnings will be weighted more heavily towards the second half of the year as land sales and fee-based income accelerate. The volume and timing of our planned land sales are largely a reflection of our strategy of matching sales to absorption of homes in our communities in order to optimize land value. Let me conclude by saying how proud I am of what our team accomplished in 2025. We delivered record earnings, strengthened our balance sheet, advanced major entitlements and expanded our platform in a meaningful way, all while maintaining a disciplined and patient approach to capital deployment. Five Point enters 2026 with exceptional liquidity, a deep pipeline of entitled land and a broader set of tools to create value across the land development cycle. We believe this positions us well to continue delivering consistent performance and long-term value for our shareholders. With that, I'll turn it over to Kim to walk through the financial details and outlook in more depth. Kim Tobler: Thank you, Dan. As Dan shared, we finished a challenging year strongly and are positioned to effectively bring land in our existing communities to market, grow our Hearthstone land banking platform and seek other growth opportunities in coming years. I'm going to review our fourth quarter and annual results for our fiscal year ended December 31, 2025. I will then conclude with some guidance on what we are expecting in 2026. In the fourth quarter, we recognized $58.7 million of net income. This is made up of the following components: we added $42.5 million industrial land sale at our Valencia community and reported a 31.25% gross margin. We also had $33 million of management services revenue, $24.6 million associated with our management of the Great Park Venture and $21.2 million of which is incentive compensation. And finally, $8.4 million associated with Hearthstone. Our fourth quarter SG&A was $16 million. We recognized $44.9 million of equity in earnings from our unconsolidated entities, $44.2 million of which was generated by the Great Park Venture. The equity and earnings from the Great Park Venture resulted from net income of $128.2 million, which was largely attributable to land sales revenue of $181.5 million from closings in the quarter, for which we reported a 75.5% gross margin. Finally, we recognized $8.9 million of tax expense. As previously noted by Dan, our results for 2025 improved relative to 2024, demonstrating the impact of the sustained focus and operational discipline we have maintained over the past several years. For the year 2025, we recognized $183.5 million in net income that is made up of the following components: our fourth quarter industrial land sale at Valencia that I previously mentioned. We also had $65.3 million of management services revenue, $53.5 million associated with our management of the Great Park Venture, $40 million of that, which is incentive compensation, and $11.8 million associated with Hearthstone's 5 months of activity. 2025 SG&A was $60.6 million, which was more than 2024 SG&A of $51.2 million. That increase was largely attributable to the Hearthstone acquisition costs, increased share-based awards granted over the past 2 years, and performance-based awards reaching established goals. We recognized $203.6 million of equity in earnings from our unconsolidated entities, largely made up of $201.3 million from the Great Park Venture. The equity in earnings from the Great Park Venture was attributable to Five Point share of the venture's net income of $584.5 million, which was derived from revenues of $825.7 million. Additionally, we recognized $28.9 million of tax expense. In addition to what Dan shared about our cash and liquidity, I also want to add that at the end of the year, our debt to total capitalization was down to 16.3% compared to 9.6% at the end of 2024. Now a few words about our Hearthstone operations. As Dan mentioned, we ended the year with approximately $3.4 billion of assets under management, which is tracking with what we had expected. In the fourth quarter, Hearthstone generated revenue of $8.4 million and net income of $3 million. For the 5 months of 2025 that Hearthstone was part of Five Point, it generated revenue of $11.8 million and net income of $3.9 million. I'd like to note that included in calculating that income was intangible asset amortization associated with the purchase accounting of approximately $800,000. We are expecting to exceed $4 billion of assets under management before the end of 2026 and expect revenue and net income to grow commensurately. Last year, I recounted the financial progress that Five Point had made since 2022. I'd like to review that again while including our 2025 results. At the end of 2022, we reported a $34.8 million net loss and finished the year with $131.8 million of cash and senior notes outstanding of $625 million. For 2023, we reported $113.7 million of net income and finished the year with $353.8 million in cash and senior notes still of $625 million. For 2024, we reported $177.6 million of net income. We paid our senior notes down by $100 million to a balance of $525 million and ended the year with $430.9 million of cash and total liquidity of $555.9 million. This year, we are reporting $183.5 million in net income. We paid our senior notes down by an additional $75 million to a balance of $450 million and are now ending the year with $425.5 million of cash and total liquidity of $643 million. We are confident in the actions we have taken to strengthen our financial condition as well as the successes we have recently reported with additional entitlements at the Great Park and Valencia. I'd like to conclude by giving some context to the guidance that Dan shared in his remarks. At the beginning of 2026, we have total -- we have a total of approximately 155 net acres of residential land remaining at the Great Park. We also have approximately 55 net acres of residential land, 11 net acres of retail land and 13 net acres of industrial land available at Valencia. These numbers do not include the recently approved entitlements at Entrada South and Valencia Commerce Center that Dan mentioned. We expect to start generating sales from these recently approved entitlements early in 2028. In 2026, we currently expect to sell 20 acres of land in Valencia and 50 acres of land in the Great Park. These sales, together with the contribution of the Hearthstone activities, is expected to result in approximately $100 million of net income for 2026. We expect the majority of the income to be earned in the second half of the year and are expecting a small loss in the first quarter of the year since we are not planning to close land sales in that quarter. In closing, our guidance reflects a challenging housing market, and our strategy remains focused on discipline. By aligning land sales with home absorption, we are projecting -- protecting value, managing risk and positioning the business for normalized demand over time. We believe this approach balances near-term caution with long-term opportunity. With that, let me turn it back to the operator, who will now open it up for questions. Operator: [Operator Instructions] Our first question comes from Alan Ratner with Zelman & Associates. Alan Ratner: Congrats on all the progress in 2025, really impressive results in a tough market, tough housing market, at least. So a lot to run through. I guess just thinking about '26, and I appreciate the guidance there, especially on the revenue and the income generation. I'm just curious when you think of your... Kim Tobler: Alan, we lost you. Can you repeat the question? Alan Ratner: Can you hear me okay? Can you hear me now guys? Kim Tobler: We couldn't hear Alan. Alan Ratner: Can you hear me now? Kim Tobler: Hear you, but we could not hear Alan. Alan, is that you? Operator: Alan, can you hear the speakers? Alan Ratner: I can hear the speakers. Can you hear me? Kim Tobler: We hear you now, Alan. Alan Ratner: Okay. Sorry about that. I don't know what happened. So I will start over. And first off, just congratulating you guys on all the great progress you made in '25. So what I was hoping to get, and I appreciate the guidance on the income drivers for '26. When you look, I guess, specifically at the 2 wholly owned projects, Valencia and San Francisco, I was hoping you could walk through a little bit what the expectation is for development expenditures in '26 and beyond. I know you mentioned the new entitlements on Valencia. So curious if we should expect to see a ramp in development spending there. And in San Francisco as well, if you can kind of quantify the ramp there now that you're expecting to begin some work there. Kim Tobler: Thanks, Alan. Just as it relates to San Francisco, we're in the process of permitting right now, which is requiring a great deal of capital. And we also have permitting that's going to be done at Valencia as well. What I'd suggest you use is for both of those projects, about the same as the capital we spent in the current year, which is about $125 million. So that will be spread between the projects and continue at that pace. We're trying to keep that pace constant as we increase the development in both places. Alan Ratner: Got it. That's helpful. And then I think -- I just want to make sure I'm understanding the entitlement approvals that you guys got. You walked through the Valencia one. I think you also have a reference to approvals in Great Park as well. And I wasn't sure, is that additive to the acreage that you guys have previously disclosed as far as what remains saleable in Great Park? Or is that just part of the main... Daniel Hedigan: Alan, Dan here. Can you hear me? Alan Ratner: I can. Yes. I can hear you. Operator: Alan says he can hear you. Daniel Hedigan: Alan, can you hear me? Alan Ratner: Yes, I can hear you. Daniel Hedigan: Alan, are you there? Alan Ratner: Yes. I am. Daniel Hedigan: We're having a little audio problem here. Okay. On your question on -- I think I heard most of your question on Great Park. So Great Park, I think we've been talking about it. We have 100 acres of land that was identified for commercial uses. But we have worked with the city because they were also identified in their RHNA plan. These sites were identified for RHNA units. So we have actually worked with them to convert that commercial to residential uses. So that is -- I think you're asking, that's really additive to anything we had before. Alan Ratner: Got it. So it was 100 acres and now you're up to what you said 150 based on this new approval? Daniel Hedigan: I'm sorry, I missed part of that, Alan. Alan Ratner: You were at 100 acres and now with this RHNA approval, you're at 150. Is that correct? Daniel Hedigan: No -- I'm sorry, yes. So what that is when -- we have land that we have -- we have existing residential land that we have not transacted on. So we still have additional original entitlement. The 100 are additive to that. And so Kim... Kim Tobler: Alan, just to be clear, we have 155 acres left at the Great Park. The 55 was already residential. And that's what was left of the residential that we were working our way through. The 100 was commercial land that has now been redesignated as residential as a result of the entitlements. Operator: There are no further questions at this time. That concludes our question-and-answer session. I would like to turn the floor back over to Dan Hedigan for closing comments. Daniel Hedigan: Well, first, I apologize for that audio problem we're having. So I appreciate everyone's patience. On behalf of our management team, we thank you for joining us on today's call, and we look forward to speaking with you next quarter. Operator: Ladies and gentlemen, that concludes today's conference. Thank you for your participation. Please disconnect your lines and have a wonderful day.
Operator: Good morning, and welcome to the Dover Corporation's Fourth Quarter 2025 Earnings Conference Call. Speaking today are Richard J. Tobin, President and Chief Executive Officer, Christopher Woenker, Senior Vice President and Chief Financial Officer, and Jack Dickens, Vice President, Investor Relations. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, press star then the number one on your telephone keypad. If you would like to withdraw yourself from the queue, you may press star two. As a reminder, ladies and gentlemen, this conference is being recorded and your participation in consent to our recording of this call. If you do not agree with these terms, please disconnect at this time. Thank you. I'd like to now turn the call over to Mr. Jack Dickens. Please go ahead. Thank you, Stephanie. Jack Dickens: Morning, everyone, and thank you for joining our call. An audio version of this call will be available on our website through February 19, and a replay link of the webcast will be archived for ninety days. Our comments today will include forward-looking statements based on current expectations. Actual results and events could differ from those statements due to a number of risks and uncertainties, which are discussed in our SEC filings. We assume no obligation to update our forward-looking statements. And with that, I will turn the call over to Rich. Richard J. Tobin: Thanks, Jack. Let's start on Slide three. Overall, we had a good close to 2025. Our fourth quarter results reflect broad-based top-line strength across the portfolio with organic growth up to 5% in the quarter, the highest level of the year. Revenue performance in the quarter was driven by robust trends in our secular growth-exposed markets as well as improving conditions in retail fueling and refrigerated door cases and services. Our strong bookings rates, which were up 10% in the quarter and 6% for the full year, continue to support underlying momentum across the portfolio, providing confidence in the durability of the demand as we enter the New Year. Book to bill was seasonally high for the fourth quarter at 1.02. Segment EBITDA margins improved 60 basis points in the quarter to 24.8%, on volume leverage and ongoing productivity initiatives. All in, adjusted EPS at $9.61 was up 14% in the quarter, beating our raised third quarter guide and 16% for the full year, a very encouraging result. Our solid operational results are complemented by our capital allocation strategy. The acquisitions that we closed in 2025 are off to a very good start, performing above their underwriting cases. Our current acquisition pipeline is interesting and is dominated by proprietary opportunities. Additionally, we initiated a $500 million accelerated share repurchase in November, underscoring our disciplined approach to capital deployment. With meaningful balance sheet flexibility, we remain well-positioned to deploy capital behind opportunities to enhance long-term shareholder value. We are taking a constructive outlook for 2026. Demand trends are solid and broad-based across the portfolio and are supported by our order book with no individual end market presenting a material headwind based on current visibility. Our balance sheet optionality enables us to dynamically respond to market conditions and opportunistically play offense. We are guiding for adjusted EPS of $10.45 to $10.65 a share in 2026, which represents double-digit growth at the midpoint consistent with our long-term trajectory and commitment to driving sustainable value creation to our shareholders. Let's go to slide five. Engineered products revenue was down in the quarter on lower volumes of vehicle services, partially offset by double-digit growth within aerospace and defense components and software. Despite the organic volume decline, absolute segment profit improved in the quarter with margins up over 200 basis points on well-executed structural cost management, product mix, and productivity initiatives. Clean energy and fueling was up 4% organically in the quarter, led by strong shipments and new orders in clean energy components as well as North American retail fueling software and equipment. Margins were down slightly in the quarter due to lower vehicle wash solutions, but still up materially for the year as we track towards our goal of 25% margin for the segment. Imaging and ID was up 1% organically in the quarter on core growth in our core marketing and coding business and in serialization software. EBITDA margin performance remains very good for the segment at 28%. The foreign currency translation and a higher mix of printer shipments slightly weighed on the margin in the quarter. Pumps and process solutions were up 11% organically with growth in single-use biopharma components, thermal connectors for liquid cooling of data centers, precision components, and digital controls for natural gas and power generation infrastructure. Sokora, which we acquired at the end of the second quarter in 2025, continues to outperform its underwriting case. Polymer processing posted its first quarterly organic growth since '24 due to the timing of large deliveries out of our backlog. Pumps and Process Solutions segment margin continues to perform at best-in-class levels. Climate and sustainability technology posted positive organic growth of 9% in the quarter on continued double-digit growth in CO2 refrigeration systems and significant volume improvements in refrigerated door cases and engineering services, which was expected based on the Q3 booking exit rate. Demand for brazed plate heat exchangers, particularly for liquid cooling applications and data centers, continues to show robust momentum with record quarterly shipments in the US in the fourth quarter. Margins were up 250 basis points in the segment on volume leverage, solid execution, positive mix benefits from secular growth-exposed end markets, with a book to bill of 1.21 in the quarter. The outlook for climate sustainability technology is very encouraging for 2026. I'll pass it to Chris here. Christopher Woenker: Thanks, Rich. Let's go to our cash flow statement on slide six. Free cash flow in the fourth quarter was $487 million or 23% of revenue. The fourth quarter was our highest cash flow quarter of the year, in line with historical trends. We are encouraged by Dover Corporation's full-year free cash flow result in 2025, which came in at 14% of revenue, an increase of nearly $200 million over the prior year. This increase was driven by improved cash conversion on higher year-over-year earnings, which more than offset expected increases in capital spend on growth and productivity projects. Our guidance for 2026 free cash flow is 14% to 16% of revenue, as we expect continued strong conversion of operating cash flow. With that, let me turn it back to Rich. Richard J. Tobin: Okay. I'm on slide seven. Full-year bookings were up 6% in 2025 after growing 7% in 2024. Q4 consolidated bookings were up over 10% over the prior year at seasonally high book to bill above one, continuing the trend of bookings momentum we experienced in the last two years. All five segments posted bookings growth in the fourth quarter, signaling broad-based demand strength for 2026. On Slide eight, we highlight the capital allocation results from 2025 with our priorities. Our highest priority capital spending is organic investment, which has proven to drive the highest returns on investment. We stepped up capital spending by over $50 million in 2025 over the prior year, with a healthy balance between growth capacity expansions behind some of our highest priority platforms as well as productivity and automation investments, including some rooftop consolidations. In total, we expect about $40 million of carryover profit from the previously announced productivity actions in 2026. Our next priority is growth through acquisitions. In 2025, we deployed $700 million across four strategic acquisitions in high-end growth markets, three of which are in our highest priority pumps and process solutions segment. These acquisitions are off to a tremendous start as we work to extract synergies through our center-led capabilities and leverage our global scale channels and supply chains. Finally, in 2025, we announced over half a billion dollars of share repurchases, including the accelerated repurchase program enacted in November. With robust cash flow generated in 2025, our dry powder in 2026 remains almost identical to the starting position from the previous year, as we have self-funded our CapEx, M&A, and share repurchases in 2025. We are in an advantaged position, and I would expect that we will be active in 2026. Let's go to slide nine. Engineered products are expected to improve in 2026. Our aerospace and defense components business continues to experience significant demand tied to electronic warfare and signal intelligence solutions. Vehicle aftermarket, which declined by double digits organically in 2025, has shown some signs of moderating demand with constructive booking trends late in '25 and early '26. With the divestitures of the STACO Environmental Solution Groups in 2024 and the growth of other segments in the portfolio, our engineered product segment now accounts for less than 15% of our total portfolio. The outlook for clean energy and fueling remains solid across most of the business. North American retail fueling is in the early innings of what we believe to be a new CapEx cycle, and the outlook in fluid transport and clean energy components is strong, with particularly robust demand in cryogenic. We expect the headwinds from the vehicle wash equipment and software to improve the headwinds in '25 to improve in '26. Clean energy and fueling should be among the leaders in margin accretion in 2026 on volume leverage and integration benefits from clean energy acquisitions. Imaging and ID should continue its long-term steady growth trajectory given its significant recurring revenue base and solid underlying demand. We are encouraged by the recent uptick in printer shipments, building the global installed base for continued long-term recurring revenue attachment. We expect demand conditions to remain constructive in pumps and process solutions in 2026. The outlook for our artificial intelligence and energy infrastructure is robust, including thermal connectors for liquid cooling of data centers, precision components for natural gas infrastructure, and in Secours inspection equipment for high voltage wire and cables. Demand for single-use biopharma components remains solid, driven by production growth and blockbuster drugs and the ongoing shift to single-use manufacturing methods. As noted, we got a tough comp in the first quarter in biopharma due to heavy restocking in early 2025. But overall, the Q4 exit run rate for the business should hold true for 2026. Finally, climate and sustainability technology should sustain its fourth-quarter exit rate into 2026. CO2 refrigeration systems are expected to continue at a double-digit growth clip. We expect the recovery in refrigerated door cases and engineering services to continue with national retailers signaling the intent to resume maintenance and replacement upgrade spending following a period of tariff-related delays. We are experiencing robust demand across all geographies for brazed plate heat exchangers, with noteworthy growth in North America tied to liquid cooling of data centers where we were booked well beyond Q1. Finally, let's go to slide 10. Full-year guidance is on the left. We'd expect seasonality in 2026 to be similar to the last few years, with Q1 volume slowly ramping into peak product delivery periods in the second and third quarters, with the fourth quarter representing an early indication of next year's outlook. We are encouraged by the momentum in our top-line performance, which marks an improvement over several years of organic growth below our long-term standard. Notably, even during that period of moderated top-line growth, our business model showed its strength as we successfully expanded profitability through disciplined cost management, strong margin conversion, and value-creating capital deployment. The setup for 2026 is constructive. We anticipate solid volume leverage on incremental revenue as well as carryover benefits from prior period restructuring efforts and accretion from M&A. We are committed to continuing our long-term double-digit EPS growth trajectory into '26. Finally, I'd like to thank our global teams for their efforts to deliver these last year's results, and we look forward to serving our customers, partners, and investors in the year ahead. Jack Dickens: And with that, let's go to Q&A. Operator: Thank you. If you would like to ask a question, simply press star then the number one on your telephone keypad. If you would like to withdraw yourself from the queue, you may press star two. We'll take our first question from Steve Tusa with JPMorgan. Steve Tusa: Hey, good morning. Good afternoon, I guess. I know. I'm weird. Right. Yeah. Had to eat lunch, delay lunch for you guys. Richard J. Tobin: Yeah. We'll go early in the morning next time around. Steve Tusa: No. It's nice to avoid the other calls. That's helpful. Price cost, what are we looking at this year? I know you guys buy a bit of steel. So are you thinking about managing the raws? Richard J. Tobin: Yeah. I mean, I think that, you know, right now, we should do what we've done every year, probably, like, one, one and a half percent over. Now clearly, we're looking into commodity costs moving up going into the year. We can talk about incremental margin and what that means. So whether we've got to go back to the well or not, we'll see based on the trajectory. Steve Tusa: Okay. So as of now, how much price are you embedding in the guide? Richard J. Tobin: One and a half to two. Steve Tusa: Okay. And then just one more question for you. You were pretty positive over the course of the quarter in your commentary. Anything you've seen in the last month or so or two months that would change that positive view and tone on just the general economy and business? Richard J. Tobin: No. I mean, look. We were looking for the best organic growth quarter for the year, and we got it. We got the margin accretion that we looked for, considering kind of a little bit of the mix differential that we had in Q4 versus the previous couple quarters. And book to bill is over one. So to me, I think that we hit the three kind of data points that we were looking for. Going into '26. You know, our backlogs are good. I think production performance should be pretty good in Q1. Don't get a little excited about production performance delivery because I think we'll really ramp and the seasonality be the same as usual. But overall, yeah. I mean, we like the setup. Steve Tusa: Great. Thanks a lot. Operator: Thank you. We'll take our next question from Julian Mitchell with Barclays. Julian Mitchell: Hi, good morning. Maybe just to start off with very strong margin performance. But when we're thinking about kind of mix for 2026, and I know there's a lot of different businesses, but I suppose you're guiding for the highest organic sales growth in these segments with the lowest EBITDA margin. So maybe help us understand in DCEF and DCS what sort of operating leverage you're aiming for this year. You know, they're sort of outsized cost savings tailwinds, for example, that mean they can have very strong operating leverage, alongside the high volume growth? Richard J. Tobin: Yeah. No. You're spot on. I mean, what we're looking for in DCEF is the leverage on the revenue growth plus that is the segment that'll be impacted the most from prior period restructuring. So the rooftop. That'll come progressively through the year. So I think that the margin enhancement that we'd expect to get there would be a little bit back end loaded just because of the restructuring benefits. The other one is DCST. You saw the margin jump in Q4 of two hundred and fifty basis points comparatively. We'll see. If we can get more on the volume going from there back to the question we had previously, that's where we're a little bit commodity exposed. Particularly in copper. So do we bounce up the top line expectations a little there? To cover that. We'll see as the year goes on. Right now, bought forward enough that we've got a pretty good idea what we'll get probably in the first half of the year. See if we need to take any pricing action there to cover any headwinds we've got on input costs. But you're spot on in terms of the mix. Julian Mitchell: Thanks. That's helpful. And maybe you've mentioned sort of seasonality, Rich, a couple of times as being sort of a normal year ahead. So should we expect, let's say, year-on-year EPS growth and sales growth each quarter to not be that different from the full-year framework on Slide 10 is, you know? Richard J. Tobin: Yeah. Most No, Julian. That's right. Right. And when we looked at consensus for the year, there was Despite the fact that I think for twelve months, it was oddly high for Q1. or not twelve or for nine months, we've been saying over and over again, be careful about So, look, the full year is the full year. We'll hit the full year, but the biopharma mix in Q1. the seasonality should be the same as it's been sitting in your models historically. Julian Mitchell: That's great. Thank you. Operator: Thank you. We'll take our next question from Amit Mehrotra with UBS. Amit Mehrotra: Thanks. Hey, Rich. Good to talk to you. So just a quick question on growth outlook for this year, 4%. Obviously, that's a good number, certainly a better number than the last couple of years, but it's a bit lower than sort of where we exited at in the fourth quarter. So maybe you can talk about it. Is that just prudent conservatism? A little bit about that. And then it looks like if I look at the margin expansion for this year, it seems like the entirety is explained by maybe that $40 million wraparound productivity benefit. Is that right? And maybe is that just the mix effect kind of offsetting some of the volume leverage? Richard J. Tobin: Yeah. I mean, the answer is yes and yes. I mean, it's early in the year. I mean, if you remember I remember sitting here last year talking about our guidance, and then we ran into tariff tumult. So there is an amount of prudence in terms of the top line and the incremental margin. At the end of the day. You know, we talked about input costs and a variety of other things. These are numbers based on what we see in the backlog that we can execute on. Whether we can move them up or not, we'll see quarter by quarter, but you know, bookings momentum has accelerated into the end of last year. So if we get that same kind of acceleration and we get the visibility, as we move through the quarter, then I would expect, you know, I think that we progressively moved up EPS last year. Based on our original guidance. We would expect to kind of look at doing the same thing. Amit Mehrotra: Yeah. That's helpful. And just related to that. So I know there was, like, a $150 million drawdown in refrigeration last year. Obviously, orders perked up in the third quarter and, I guess, are continuing to move in that direction. Do you feel confident you're able to get all of that back from where we stand today? Richard J. Tobin: We're sold out for Q1. That's what I can tell you. So we're booking, and that is relatively short cycle business. And we're booking well into Q2. So, so far so good. Amit Mehrotra: Okay. Very good. Thank you very much. Appreciate it. Richard J. Tobin: Well, yep. Operator: Thank you. Our next question will come from Jess Brock with Vertical Research Partners. Jess Brock: Hey. Thanks. Good day, everyone. Hey, Avery. It's just back on the incrementals and everything. We've touched on this a little bit. But just cutting through all the different mix changes and the like, just want to make sure there's not anything below the line I'm missing. It looks like you're sort of guiding it observed incremental as reported about 35%. Is that right? Or is there something else you know, in between kind of OP and the bottom line to be aware of? Richard J. Tobin: There's nothing really on the bottom line, Jeff. So you're close on the number or right. You're right on the number, more or less. Jess Brock: Yeah. And then, you know, secondhand. Right? So I'll be careful. But you know, there's been some chatter that you've made some noise about you know, kind of transformative sort of deal generational deal, something very large. Maybe just to kind of address your appetite for really large, or are you more inclined to stick with bolt-ons? Anything you could add there? Richard J. Tobin: Well, it's better than the retirement one from last year. So I'll take the I'll take the transformational deal angle. You know, we're not going to talk about anything in the pipeline. It's not been our history here. I mean, we have a very keen eye about execution risk. I'm sure that we'll do some M&A this year. If we were to consider something transformational, it would have to be shareholder-friendly to Dover Corporation at the end of the day. So it's not as if we look at the way that we look at the business and the business that we own and say that we've squeezed everything out of it. And then now we've got to go do something to move it on. I think we've got a good algorithm here with bolt-on deals and growing the top line that we're not required to do anything, I guess, is the best way I can describe it. Jess Brock: Yeah. Hey. And then maybe I'm sorry. It's a third one. Jack, don't get mad at me. But just back on revenues, you noted, you know, maybe there's some conservatism here. But you know, just thinking about this order growth rate that's been ahead of revenues now for a significant period of time and the fact that things like Secora were coming into organic at, you know, like, faster rate. Like, is it just anything that's more long cycle in the orders or something that doesn't convert quickly? You know, to kind of explain that apparent looking disconnect. Richard J. Tobin: I mean, at the end of the day, I mean, three to five, without getting over our skis here, is a pretty good number. But you're right. If I look at the velocity of orders coming in, you could roll forward and see. Q1's always a kind of an interesting quarter for us because we have a lot of production performance and then we ship a lot in Q2 Q3. I think part of it is let's get into Q1. Let's see if we're manufacturing backlog or we're replacing what we're taking in production performance with new order flow. And if that's the case, then, you know, we'll take a close look at the top line. And, again, don't want to repeat myself, you know, we are cognizant about input costs moving up. And if we have to take pricing action, that will actually drive some top-line growth also. Jess Brock: Right. Okay. Great. I'll leave it there. Thanks, Rich. Richard J. Tobin: Yep. Operator: Thank you. We'll take our next question from Joe O'Dea with Wells Fargo. Joe O'Dea: Hi. Thanks for taking my questions. Wanted to start on the retail fueling CapEx cycle side of things and just if you could elaborate on what you're seeing there, some details across regions, how you think that plays out over the course of 2026 in terms of any accelerating demand there? Richard J. Tobin: It's very much a North American phenomenon. We've actually drawn down our exposures in both emerging markets in EMEA. We haven't left, but we've taken that that's actually been a drag on our top line over the last three or four years that we've gone and done eighty twenty on the customer side. And other than that, it's look. Since February, EVs were taking over the world. So there was not a lot of CapEx spent in retail fueling. And that was reflected maybe not in the margin, which I think we've done a fantastic job of, but on the top line. Well, that's kind of turned the corner here. And if you go look at someone like Costco and what margins are fueling are right now, I think it's woken up the market that spreads at the retail are as high as they've ever been. So and that's gonna drive returns on projects. Joe O'Dea: And then just on the restructuring side, you've got the $40 million carryover from actions last year. I think in the past, you've touched on there could be more to do there. And so just how you're approaching that, when you would make any decisions around it, parts of the business that would see a bigger impact if you do decide to do more? Richard J. Tobin: I think we got a pretty full plate on what we're doing now. So there's a lag time between looking at proposals and then enacting them. Like, if you take refrigeration, we're actually going to carry extra fixed costs for the first half of the year as we're taking down one facility and building another one. So we don't really get the benefit of that until the back half of next year. And that's the same for clean energy to a certain extent. But yeah. Look. Every year, we've got a goal of attacking fixed costs. So we'll update you as we take the charges. We'll tell you what they are and where they are. Joe O'Dea: Got it. Thank you. Richard J. Tobin: Yep. Operator: Thank you. We'll take our next question from Nigel Coe with Wolfe Research. Nigel Coe: Rich, I thought it'd be interesting to think about growth, you know, bifurcated between your, you know, the 20% of what you call secular growth markets and that's been growing double digits. And then the trough markets that are, I don't know, 40%, 50% you know, Marks, Web, Bellback, BSG, refrigeration. Just maybe just talk about, you know, what you're seeing in those two buckets in 2026. Richard J. Tobin: Yeah. The growth bucket is going really well. You have really nothing to add to it. So anything that we'd said over the previous three quarters of last year, that trajectory has continued as I'm so we're good there. I mean, the ones that have been a headwind, I mean, in Belvac, that one's easy. We're just gonna have to wait for the CapEx cycle to turn in can making. At least the conversations are getting there, but we don't really see it in backlog yet. On vehicle service group, that has very much been a European story. And that is why despite having the headwind on the top line, you don't see a lot of margin dilution because that's just reflective of the difference between the regions where we make high margins and not. A certain extent. I don't see that improving yet. But we're almost in year three of Europe being down there. So one would expect that that could turn hopefully during the year as we go forward. And refrigeration was an anomaly. I mean, we discussed it at length at the '3. It was deferment but we showed you the backlog building in Q4 and then look at the growth and the margin expansion. We got in Q4. And as I mentioned to one of the questions, we're sold out for Q1, and we're booking well into Q2 now. So it doesn't look like you know, there's always so much we can make in a given year. Right? We're from a capacity point of view because we've actually taken a lot of capacity out there. But with real what we said about going into '26 is reflected in our backlog and was reflected in the revenue growth in Q4. Nigel Coe: Okay. So refrigeration is recovering nicely. Sounds like MOG is still, you know, still some headwinds there. Everything else fairly steady. Is that a good way to summarize that? Richard J. Tobin: Yeah. Yeah. MOG's gonna, you know, MOG's will see it because and you'll see it in the backlog because the dollar value of MOG's orders are so high. You'll know when it's coming. And right now, it's fair to say that the European chemical market is not doing well. Nigel Coe: Yeah. That's not a shock at all. Just a quick clarification on the internal margins. Is there a structuring payback to sustain 35% saving of raw margins, given the mix pressures you've highlighted? So or could that be? Richard J. Tobin: No. I mean, I look like, you know, I think that, you know, when you do the math and you look at the incrementals, I think that there's more upside than downside there. Nigel Coe: Okay. Clear. Thanks, Rich. Richard J. Tobin: Yep. Operator: Thank you. We'll take our next question from Scott Davis with Melius Research. Scott Davis: Hey, good afternoon, guys. Scott. Hey, Scott. Rich, if you take a step backwards, you know, his portfolio has changed quite a bit since you've taken the helm here, but what do you think the entitlement the new entitlement kinda through cycle growth rate is of this portfolio you have now? Is it kinda right we're kinda in that sweet spot around 5%? Is it four to five? Richard J. Tobin: Yeah. I mean, you know, it is somewhere between three to six, depending on GDP and everything else. But you know, clearly can do five. Scott Davis: Okay. That's what I would have thought. And, guys, it's been a kinda been a while since we've talked about, you know, closed the case, you know, that whole nonsense thing that kind of went up and went down. And Yeah. Are would you've got a big installed base, and it's gotta be aging out. Is there any way to think about the age of that installed base and kinda what the and be able to just socialize maybe the pent-up demand how long those things last before they need to be replaced, etcetera. Richard J. Tobin: Well, it's a little bit of a that business is a little bit of a tale of two cities. There's the CO2 rooftop, which is a change in technology play. We're knock wood. We are the North American market leader, and we're a co-leader in Europe, and we're the North American market leader, and we're doing really well. Because for a variety of reasons. And that's that I would put into the kind of the growth platforms and, you know, when Jack gives you those numbers, that CO2 business is in there. On the retail refrigeration door case business, we've taken that business from somewhere around seven or 8% margin up into the very high teens now. We're finishing the last CapEx. We put you know, we've basically rebuilt the industrial footprint there. So what we end up is with, like, a core refrigeration business, which is around a half a billion-ish dollars, at very nice margins and extremely good cash flow because it doesn't hold any working capital. So it's worth significantly more today than it was back in the day when it was a discussion element. We'll grow that business, but we'll grow it for profitability and we'll grow the CO2 side as quickly as we can because that's we're in the early innings there, and we've got a leadership position. Scott Davis: Okay. Helpful. Good color. Thank you. I'll pass it on. Good luck this year, guys. Richard J. Tobin: Thanks. Operator: Thank you. We'll take our next question from Mike Halloran with Baird. Mike Halloran: Hey, good morning. Well, afternoon, everyone. So first on the clean energy margins, prepared remarks, you mentioned that the mid-twenty percent target. Maybe just some timeline on when you think you can get there, Rich. Richard J. Tobin: You're gonna have to walk it up. So, you know, knock wood, should get into the low twenties this year. And then walk it up from there. Can we accelerate it? Gonna depend it on a little bit of mix. And I really wanna see we we still kind of in a transitional period on the footprint side. So what we really get out once we're done and what the benefit of the fixed cost absorption on the is once we get that done. So we're still doing that now and will probably be completed by the end of the year. On that. So just on the top line, we think we can get into the low twenties. From there, it's gonna be on the roll forward of the cost out. And your guess is as good as mine. We're really excited about the longer-term opportunity on the cryogenic side. Which is not a super large business for us, but becoming larger. If that growth rate and that opportunity continues to expand, then we're very excited about it. Mike Halloran: That makes sense. And then you touched on it briefly there, but you know, you've had comments about, you know, there's only so much capacity to drive the growth. At the same time, you're also doing some of these internal initiatives, managing capacity lower. How do you see that push-pull as you work through the year? Are there areas where you might be putting incremental capital to expand capacity? Or do we feel pretty good about the network as we sit here today and then what's left on the pairing side? Richard J. Tobin: Right now, CapEx is coming down in '26 because of the basically, the completion of the expansion capacity and the restructuring capacity. So coming down. We feel good where we are. We are greenfielding a plant or beginning to greenfield a plant in North Carolina. That'll probably take us into '27 by the time that's complete. So, you know, we got a flexible model. I mean, we can kind of expand capacity relatively quickly, but the only new one that I would add to that is the greenfield plan in North Carolina. So besides the ones that we had in flight that we detailed in Q3, Mike Halloran: Thank you. Richard J. Tobin: Yep. Operator: Thank you. We'll take our next question from Andrew Obin with Bank of America. David Ridley Lane: Hi. This is David Ridley Lane on for Andrew Obin. Wondering if you could talk about your exposure on sort of the natural gas power generation side. Do you supply components for just large turbines, or is it small turbines and reciprocating engines as well? And then notably, over the last kind of three, six months, there's been a number of capacity expansions by the equipment providers and to still participate in that. Thank you. Richard J. Tobin: The answer to your question is yes, yes, and yes. So everything from large turbines to midstream to reciprocating compressors, that the large turbine business is kind of front-running the market right now. And while capacity in percentage terms has moved up quite a bit, these are very, very big units. So the unit value is high, but the number of units is not dramatic. We believe that going to be significant follow-on CapEx on the delivery side, meaning getting the natural gas to those turbines. We expect that to kick off hopefully, but expected to kick off in the '26. David Ridley Lane: Got it. And just a sort of clarify a thing from the slides. There's something about price cost in the fourth quarter for the clean energy and fueling segment. Is that kind of one-time? Or Richard J. Tobin: You know what? You got Christopher Woenker: Yeah. It's just a bit of a timing catch-up in terms of when the price comes in relative to the cost. So it's really just a timing thing we see in the fourth quarter. David Ridley Lane: Got it. Okay. Thank you very much. Richard J. Tobin: Thanks. Operator: Thank you. We'll take our next question from Andy Kaplowitz with Citigroup. Andy Kaplowitz: Good afternoon, everyone. Hi, Andy. Hey, Rich. You mentioned as you get better visibility, then you could adjust revenue guidance. But given book to bill has been pretty good over the last couple of quarters and you still seem relatively positive about your markets, do you have visibility at least to continue that near-term book to bill out or over one that you've been delivering? Richard J. Tobin: That, you know, I don't know. Right? As I mentioned in my earlier comments, right, that Q1 tends to be a production month and not much of a shipment month. Right? So and part and parcel to having a discussion I mean, I can't believe we're giving out guidance and talking about moving guidance already. But part and parcel to that is getting through Q1 and seeing whether we're eating into our backlog or we're neutral or is backlog building even in excess of production, which is basically what we'd have to add into the back half of the year. So, you know, look, we were here the same time last year, and then the s hit the fan in February. So let's get into the year. Right now, all things look good in terms of trajectory, you know, exit trajectory and backlog trajectory and orders and everything. Let's kind of walk it into Q1 and we'll give you an update when we get there. Andy Kaplowitz: That's helpful, Rich. And then I want to ask you. Know it's kind of a GDP, maybe a GDP plus business, but what if anything gets you going there a little bit more? I know the low single-digit forecast for '26 and you did mention you're in the middle of the sort of multi-year margin expansion progression and structural cost out. So where are you in that progression? Do you still have, you know, good margin upside in that segment? Richard J. Tobin: We're actually deploying a bunch of CapEx into that business right now. Kind of some modernization and productivity. So if that all goes well, that'll drive margin. From there, you know, it's consumer goods exposed. I don't follow consumer goods that closely. Well, whether we see capacity expansions there, which would drive kind of the organic growth higher than kind of normal. But, I mean, it's such a messy number. Because it's a global business and it's got a lot of FX running through it. We try not to get above our skis. On kind of the longer-term growth rate because it flops around. But it's a highly valuable business when you look at the cash flow dynamics of it. Andy Kaplowitz: Helpful, Rich. Thanks. Operator: Thank you. We'll take our next question from Brett Linzey with Mizuho. Brett Linzey: Hey, good afternoon all. Hi. Hey. Question on the 20% of the business tied to the secular market. You've done a good job highlighting that over the last several quarters. Curious postmortem, how did that group of businesses grow in 2025? And then are you still seeing a pretty solid double-digit type of rate here for '26 for that 20%? Richard J. Tobin: Yes and yes. Brett Linzey: Okay. And then, a follow-up on capital allocation. So slide number eight, the dotted bar stack frames the optionality on the flex leverage. Maybe just an update on the investment-grade leverage ratio that's implied there. I would imagine that it's calculated off of full-year 2025 EBITDA. Right. And it is probably the max leverage with some wiggle room kinda to maintain investment grade. So it's just simple math. Richard J. Tobin: Yep. Brett Linzey: Okay. Got it. I will leave it there. Thanks a lot. Richard J. Tobin: Thanks. Operator: Thank you. We'll take our next question from Joe Ritchie with Goldman Sachs. Joe Ritchie: Hey, guys. Good afternoon. Richard J. Tobin: Hey, Joe. Joe Ritchie: So I'll start by just asking I mean, I'll ask the flip side to Jeff's question from earlier. So not talking about big deals, but potential across your business. I know you look at your portfolio frequently. Just how are you thinking about the portfolio as it stands today? And potentially, you know, addition by subtraction? Richard J. Tobin: Well, I mean, we've got a fiduciary responsibility if someone wants to purchase a portion of the portfolio. We have to consider it. Number one. Right now, we're comfortable with what we own. We do preserve optionality if we were to lever to do deals that we could delever. By monetization of the portfolio as an option per se. But right now, we're fine with the portfolio as it is. Either organically investing in it, or the portions that we've historically done more M&A. Joe Ritchie: Okay. Alright. Good to hear. And then I'm not gonna ask you to change guidance. You just gave guidance. But if you go back to that slide nine and you take a look at your organic growth expectations for the year, where across the portfolio do you think you have the biggest swing factors this year? Richard J. Tobin: I mean, they're all correct. And if you added one percentage point to all of the you know what I mean? It's there's no you know, this one can double based on our expectations. It's more of you get a point here? Do you get a point here? Do you get a point there? And, you know, when at the end when you add it all up, adds a couple points to the top line. So I don't know, without getting over our skis here, I think that those are directionally absolutely right. Joe Ritchie: Okay. Sounds good. I hope you get that point as we progress through here. Richard J. Tobin: Thanks, Joe. Good to talk to you. See you. Operator: Thank you. Our final question comes from Deane Dray with RBC Capital Markets. Deane Dray: Thank you. Good day, everybody. Richard J. Tobin: Hey, Dean. Deane Dray: Hey. Maybe just pick up on Joe's question there because I've been staring at page nine, and I'm trying to remember the last time you know, you had organic growth all green and all the arrows on margin. Pointing up uniformly like that. And it just it begs the question, was there anything different about the planning process this year? Is this strictly a bottom-up aggregation of each one of the businesses? Or did you overlay in any way, haircut anything, you know, remember a year ago, the tariffs you decided that you did want to be a little more conservative. So is there any element of trimming or boosting here that you'd like to share? Richard J. Tobin: Sure. I think it was in the comments, but I mean, I think that we were pretty upfront over the last two or three years of some of the longer cycle businesses that had done extremely well were cycling down. Because it was coming out of the backlog. So, you know, the MOGs and the Belvacs of the world, we knew that we were exiting some businesses or some revenue in Europe. In our fueling solutions business that was gonna be negative. That was incorporated into our guidance. So meaning top-line headwind, but margin up. And then we did not have a I don't know. I think that we had thought going into '25 that we were concerned about vehicle service group in Europe, and that's the way it turned out at the end of the day. So I think what this shows here is that we don't have an identified headwind like we have whether it's because of long cycle businesses cycling down, and or particular markets that we think are under duress. Deane Dray: That's helpful. Thank you. And just a quick one. Backlog has come up a bunch of times in Q&A here. Just directionally, how much of 26 revenues do you expect are in backlog today just kind of directionally? And how does that compare to other normal times? Richard J. Tobin: I don't know in total. I can just tell you anecdotally. I think I mentioned it before. Something like refrigeration that grew heavily in Q4. Right? And that is not a normal state of affairs. We generally bleed in historically in that particular business. Or most of our businesses actually bleed down backlog because we built so much backlog in Q4 of this year, in Q4 and replace it in Q1. The swing factor is going to be do we eat into it in Q1, or does it just continue to build? And if it does, it's proactive for the back half of the year, but we'll know that in the next sixty days or so. Deane Dray: Thank you. Richard J. Tobin: Thanks. Operator: Thank you. That concludes our question and answer period. End of Dover Corporation's Fourth Quarter 2025 Earnings Conference Call. You may now disconnect your line at this time, and have a wonderful day.
Operator: Good morning, ladies and gentlemen, and welcome to Champion's Third Quarter Results of the Financial Year 2026 Conference Call. [Operator Instructions] I would now like to turn the conference call over to Michael Marcotte. Please go ahead. Michael Marcotte: Thank you, operator, and thank you, everyone, for joining us here to discuss our third quarter results. Before we get going, I'd like to highlight, we'll be using a presentation that's available on our website at championiron.com. I'd like to highlight that throughout this call, we'll be making forward-looking statements. If you want to read more about forward-looking statements, risks and assumptions, you can also visit our MD&A, which is also available on our website. Joining me here today includes many of our executives, including David Cataford, our CEO, who will be doing the formal portion of the presentation; and our COO, Alexandre Belleau. With that, I'll turn it over to David. David Cataford: Thanks, Michael. Thanks, everyone, for being on the call today. I'm very happy to be able to present the fiscal year 2026 third quarter results. In terms of the highlights, so we managed to produce roughly about 3.7 million tonnes during the quarter and sold just shy of 3.9 million tonnes also during the quarter. One of the big highlights as well is we've continued to improve on our cash costs. So our cash cost delivered in the vessel in Sept-Îles was just below $74 per tonne, which translated in the quarter when you look at the realized price of an EBITDA of $150 million, a little bit less than the previous quarter, but the main difference was essentially the provisional price adjustment. So we managed to have a pretty flat quarter-on-quarter. In terms of community governance and sustainability, continued working with local communities and also with the -- our First Nations partners of Uashat mak Mani-utenam. One of the big highlights is we managed to send roughly about 160 people to the community to do a full immersion to be able to work alongside with the community, again, strengthening our partnership and allowing us to view potentials for growth in the future alongside our partners in Uashat mak Mani-utenam. In terms of operational results, one of the highlights for the quarter is definitely the amount of tonnes that we were able to bring down from the stockpiles at Bloom Lake. A lot of those tonnes are now sitting at the port, but we much prefer having them closer to the vessels at the port than on stockpiles at the Bloom Lake site. So we managed to decrease our stockpile by about 1.1 million tonnes quarter-over-quarter, reducing the stockpile to about 600,000 tonnes at the mine. Our inventories increased at the port to roughly about 900,000 tonnes, and we'll be able to destock that over the next few quarters to be able to fill the vessels [ in this system ]. In terms of our operations, again, as we mentioned, quarterly concentrate production of about 3.7 million tonnes. What's important to note as well is that we continue to operate in a way that keeps the mine very healthy. So when you look at our strip ratio, the amount of tonnes of waste that we've moved during the quarter, again, making sure that ore is available and that we can continue working on our blending strategy to make sure that we can dilute down a portion of the harder iron ore that we've had in one of the small zones that we discovered that we disclosed to the market a few quarters ago. In terms of the industry overview, so a pretty flat quarter when you look at the P65, the freight and the premium for the P65 over the P62. So during the quarter, P65 averaged about $118 per tonne, a slight increase of about 1%. There was a very slight decrease in terms of the premium for the P65 over the P62 and a slight increase in C3 freight cost of about 2% during the quarter. But again, pretty flat in terms of quarter-on-quarter. What does that do on our provisional price adjustments? So when you look at this quarter, very uneventful provisional price adjustment, about USD 3.3 million over the quarter. When we account this over 3.9 million tonnes that were produced, it has an impact of about $0.80 per ton in terms of the tonnes sold. When we look at the tonnes that are still on the water now at the end of the 31st of December, we had about 2.5 million tonnes in transit, and we've expected a price of around USD 117 per tonne. If you look at our average realized selling price, pretty close to the P65 index. As you know, we have some tonnes that are still subject to slight discounts due to the fact that we're selling more on spot and not on long-term contracts. This is the year that we'll be able to start shifting that portion because as we deliver our new plant and we're able to sell 69% iron ore, we will now enter into longer-term contracts. But when you look at this quarter, when we account for the conversion of U.S. to CAD and discount the freight cost, we had a net realized price of about CAD 121 per tonne. In terms of our cash costs, so we've continued working on our cost at site, reducing again our cash cost during the quarter to just below $74 per tonne delivered in the vessel, pretty big decrease, and we're continuing to work on our costs. So as you know, the main factors for us is definitely when we have a good iron ore recovery and we have good production, that definitely reduces the cost per tonne at our site. Mind you, this quarter was a quarter that did not have a major shutdown, but still continuing our downward trend in terms of operating costs. What does that translate in terms of financial highlights? So as we mentioned, revenues of about $470 million, EBITDA of $150 million and a net income of $65 million for the quarter. In terms of our cash, so cash sits at roughly about $245 million on the 31st of December this year. Main impacts were obviously the cash flows from operations, where we invested, we invested mostly on the sustaining CapEx and also the DRPF CapEx, and we also paid out our semiannual dividend during the quarter. There was also a change of working capital, mainly due to receivables that have increased. So that should unwind in the next quarter. In terms of our balance sheet, very well positioned to be able to continue our growth initiatives, about $1.1 billion of cash, cash equivalents and working capital and also including the available liquidities that we have on our various facilities. So very well positioned to be able to finalize our growth initiatives. Talking about our growth initiatives. So if we look at our main project, the DRPF project, so we're coming close to completing the project now and being able to commission the first tonnes, still on target to reach our $500 million investment for the full project. Right now, all the equipment is installed. So it's just finalizing some tie-ins with the equipment, and we're now also starting the commissioning of certain equipment as we speak. So pretty excited about the next steps for this project. We're still on target to be able to deliver our first tonnes of DRPF and our first vessel in the first half of this year. When we look at the impacts of starting the plant, we just need to remind everyone that there are some impacts that will come with the interactions with the Phase 2 project. So there will be some interruptions in the plant as we commission the various equipment. We had forecasted in our feasibility study roughly about 20 days for the Phase 2. We'll try to make up a portion of that for -- in the Phase 1 plants, but there will be some interactions in the coming quarter to be able to fully commission this plant. But once that's done, we do expect a ramp-up of roughly about 12 months to be able to get the plant fully running and minimal impacts on the actual Phase 2 production once the tie-ins are completed. So very exciting because we're now finalizing all of the potential contracts with various clients. We do expect to sell most of those tonnes in markets that we had announced, so either Europe, North Africa or Middle East. So working with our partners to be able to finalize those contracts, and we'll be ready for when these tonnes come into the market in the first half of this year. One of the other highlights that we discussed also just a few days before Christmas was the potential acquisition of Rana Gruber. So we entered into a transaction agreement with Rana Gruber to acquire the company. The transaction is fully financed. So a portion of cash, roughly about USD 39 million. We have La Caisse de dépôt, one of our long-standing partners that is also supporting us for USD 100 million. And we also have a fully underwritten term loan with Scotiabank of USD 150 million that we'll start syndicating down to our bank syndicates. So as my understanding, all of our partners are very happy to support us with this transaction. Again, just to remind everyone why we're doing this transaction. Well, one, Rana Gruber is a robust operation that's operated for over 60 years, uninterrupted in all of the various cycles. They benefit from pretty interesting margins in terms of the material that they produce, and they're also on track to start producing higher-grade material, which is fully aligning with what we do at Bloom Lake. They're also very well positioned versus European clients. This is a client base that we want to increase in the future. And there are just a few days of sailing time from their various clients, making it a producer of choice for a lot of steel mills in Europe. We do think there are opportunities in the future with the asset to be able to potentially increase on the volume side, and we also benefit from an extraordinary team over there, fully aligned in terms of values and operation style. So we do think that this is very positive to be able to combine the 2 -- these 2 assets. In terms of our other projects, so as you know, we're also working on the feasibility study and the permitting of the Kami Project. So that's all going according to plan. We should be in a position by the end of this year to finalize the feasibility study and potentially obtain our construction permit for the project and also fully aligned with our partners, Nippon Steel and Sojitz to be able to continue on the next step. So we'll see once we finalize the feasibility study and the permitting process, where is the market for DR grade type material, and we'll then be able to look at the next steps for the project going forward. We also, just to remind everyone, have over 5 billion tonnes of resources just south of Bloom Lake. So we are doing a little bit of drilling just to make sure that we can refine our estimates in terms of the actual tonnes over there, but all very high-grade material that is -- I think will position us very well in the future. Short term, maybe no impact, but in the medium, long term, could definitely be very beneficial for our company. So with that being said, I'd like to thank all of our staff and everyone for making these results possible. I think, again, a very good quarter. We had a few hiccups last year and definitely had some quarters that were impacted by either forest fires or a bit of breakage on certain equipment at our site. But I think that's behind us, and we're now back in a very good operational position. And I think when you look at the results and the cash costs that are continuing to come down, it's a proven element that we're back on track in terms of operations. So with that being said, I'll turn it over for the Q&A portion of the call. Operator: [Operator Instructions] Your first question is from Julio Mondragon from BMO Capital Markets. Julio Mondragon: So I just got a couple of questions. But the first one I would like to ask is, well, you have seen the cost reducing significantly quarter-on-quarter, what are the key drivers of this cost reduction? And also, how sustainable this is in the near term? Like what would be your unit cost target for the next few quarters to understand a little bit more about your cost strategy here. David Cataford: Well, the cost strategy is always to produce at the lowest cost possible. When you look at the results, well, obviously, this was a quarter that didn't have a major shutdown. So quarter-on-quarter, that was one of the impacts in terms of the cost reduction. When you look at the amount of tonnes that were produced, definitely, when we produce more tonnes, well, we'll always have a lower cost per tonne. So that's definitely one of the elements that has improved. And as we come out of this whole stockpile history portion, well, that's definitely going to reduce our costs as well going forward. So those are the main elements. But our strategy is definitely to continue working on various elements that we can improve our costs. How do we do that? Well, we're improving the mining efficiency, also working on our shutdowns to be able to be more efficient. If we can get that plant up and running a little bit more often, well, that's going to allow us to produce more tonnes, it's going to dilute down a lot of our fixed costs. So those are definitely the strategies that we have shorter term to be able to continue on the trend to have good operating costs. Julio Mondragon: And if I could ask one more question. So currently, you are targeting commercial production in the first half of this year from the DRPF plan. So does it mean you are going to achieve nameplate capacity in this period? And also because we're talking about premiums, can you provide a quick outlook of the market and the premiums for this product? David Cataford: Yes. Thanks for the question. So once we get the plant up and running, we believe the ramp-up time is going to be roughly about 12 months to get the full nameplate capacity. So that's the time frame to be able to get the full nameplate capacity. If we can do it quicker, well, we'll definitely come back to the market, but that's what is in our plan right now. In terms of premiums, well, obviously, when you have a new product like ours, at 69%, we need to be able to prove to our various clients that we can hit that number and that it reacts well in their plans. So there's always some trial discounts to the DR grade premiums when you look at the first cargoes. But I think once we are able to demonstrate to our clients that we're hitting consistently the quality, well, then we'll be able to get out of that territory and start benefiting fully from the CR premiums. In the market today, the DR premiums have increased slightly compared to last year. So I do think we're in the right trend. But for us, you have to remember that, one, there's the premium that is interesting, but there's also the freight advantages by selling closer to home. So when you combine those, I do think we're going to have better margins for our material, hence, better returns for our shareholders. Operator: Your next question is from Orest Wowkodaw from Scotiabank. Orest Wowkodaw: Two things from my end. First of all, on the ship loader issue at the port of Sept-Îles, how -- is that rectified? Or how long was that down? I'm just wondering when normal shipments would have resumed post year-end? David Cataford: Yes. Thanks for the question. That was roughly about 4, 5 days. So it wasn't a -- well, I mean, we consider it major, but when you look in the yearly results, it's not necessarily major, just annoying for us because we would have sold probably an extra vessel during the quarter, which would have been nice. But realistically, the operations restarted about 5 days after the breakage. I don't think it's something that is necessarily recurrent, just an issue that happened, but unfortunately, happened right at the end of the quarter. Orest Wowkodaw: Okay. So should we expect that the 900,000 tons of inventory at the port to basically be cleared out here in the current quarter? David Cataford: Well, there's always going to be inventory at the port because as you know, vessels are roughly about 200,000 tons. So it's tough for us to clean out the inventory completely. So I'd say probably closer to 2 quarters to be able to get down to a level that is more in the range of having one vessel on the ground. So that's realistically about the time frame that we believe we can get those tonnes down. Orest Wowkodaw: Okay. And then just changing gears back to the DPRF. Should -- I realize you're not expecting commercial sales, I guess, until sometime in the second calendar quarter. But should we -- like as we're waiting for better visibility on what premiums may look like, should we start to anticipate that like we're going to see some increase in your blended realized price starting as early as Q2 and that ramps over future periods? Or should we just thought -- or is that not realistic? David Cataford: I think it's probably closer to Q3 where you're going to start seeing some results. Q2, definitely, we're going to have our first tonnes that are produced, first tonnes that are sold. But depending on how the actual integration goes and we're able to start up the plant when we look at the interruptions that we'll have to be able to tie in the actual plants together, I think in Q2, that's not when we're going to start seeing the results. It's more in Q3. Orest Wowkodaw: Okay. And when you mentioned earlier also the 20 days of tie-in, is that this current calendar quarter? Is that when that's expected? David Cataford: It's Q1 of fiscal year 2027. So sorry, I think I said on the call this quarter, but in my mind, we're already in April. Orest Wowkodaw: Okay. okay. So we're talking calendar Q2? David Cataford: Correct. Operator: [Operator Instructions] And your next question is from Fedor Shabalin from B. Riley Securities. Fedor Shabalin: David, so several quarters ago, you mentioned that Bloom Lake output could reach between 17 million and 18 million tons annually once all bottlenecks are resolved. The progress of debottlenecking in the fourth is clearly visible. And my question is, where are we now on the path to achieving this 17 million, 18 million tonne production target at Bloom Lake? And I would assume we're not far away. And what additional steps remain to get there? David Cataford: Yes. Thanks for the question. When we go back, the main target for us was definitely to make sure that if we do some investments, we'll be able to get those tonnes down. So the main focus was really to be able to work on the rail portion to make sure we can get the tonnes. When we look at the last quarter, we brought down quite a lot of tonnes from site. So that definitely gave us some good visibility. Now we're in a situation where we're back in the very, very cold winter months. It's actually a very cold winter up to now. So there are some elements that impact the rail portion. But when we take all that into account, I do think we're in a territory where we feel more confident that the logistics side will be able to bring down the tonnes. So now most of the work to be able to define what needs to be done to be able to increase the production is pretty well known. So we're going to start working on those projects to be able to look at the debottlenecking. But that was also one of the thought processes when we looked at acquiring a project like Rana Gruber. So initially, we thought those tonnes would come from Bloom Lake. I still think that Bloom Lake will get to the 17 million, 18 million tonnes. But in the interim, we will now have an asset that produces just shy of 2 million tonnes out of Norway, and that's definitely going to help as well in terms of the production increase. Fedor Shabalin: Yes. That's helpful. And my follow-up question is on DR grade market overall. What does the current landscape look like? And how large is demand now? And do you anticipate any changes to premium above 65% Ferrum from P65 that you outlined previously? And if I recall correctly, it was roughly in the ZIP code of $20 per metric ton. And are there plans to sell a portion of DR pellet feed output to third parties? David Cataford: Yes. Thanks for the question. So the thought process is not to sell those tons to third parties. So we want to sell directly to the steel mills that require this type of material. Again, when we look for potential clients, we want to make sure that they have the right ports so that they can take capesize vessels so that we can fully benefit from the closer to home tonnes. If there are some advantages by going with the smaller Panamax, but there's still some freight advantage for us, it's definitely something that we can look at. But when we combine the freight advantage and also the premiums for the DR, once we get out of the trial cargoes, I do think that the market is looking pretty good to be able to get a significant premium on our side. When you look at this year, well, the DR grade seems to be in a better position than it was last year. But again, there's quite a lot of noise with projects like Simandou coming on. So it doesn't impact the DR grade, but it did impact the view on the high-grade material, not necessarily ramping up to the level that was initially expected. So I think that's keeping the high-grade portion quite healthy. But we will see in the next quarters where that DR premium goes. But when we look at the fundamentals, there's quite a lot of plants getting delivered that need this type of material. There are some plants that have tried to also find ways to upgrade material that might not deliver the results that they thought. So that will definitely be some potential clients for us down the road. But when I look at the environment closer to the whole Sept-Îles port, I do think that we'll have the right clients to sell our material at the right premium there. Operator: Your next question is from Dalton Baretto from Canaccord Genuity. Dalton Baretto: David, I wanted to start by asking -- well, I've got 2 questions on Rana Gruber. I'll start with the first one. When you look at their client base, particularly in Europe, do you see any synergies there with you trying to place the DRPF material? Does that help you in any way? David Cataford: Thanks for the question. So definitely some advantages just in the fact that also they're so close to their clients. So when we sell to Europe, we're close, but we're not that close. They're about 3 days sailing time. I think there's some good potential combinations on that front. When I look at potential blending strategies, that's definitely something that's top of our mind as well. So is it possible to have some potentials in that front to be able to get a better premium for material. That is something that we will look at. I think the main focus now is definitely closing the transaction, making sure that the asset is under our control in the next few months. And then I definitely see some potential advantages and synergies with clients in Europe. Dalton Baretto: That's great. And then similar sort of question, but on the operations side, I was looking at their Capital Markets Day presentation from last year, and it looks like they're about to set off on the same trajectory that you guys just went through in terms of upgrading their material to DRPF. Given what you guys have just been through, do you think that you can accelerate that time line at all? David Cataford: There's various ways to look at it. If you remember, even at Bloom Lake, initially, we thought, do we want to build 1 or 2 flotation plants and get all of our tonnes to 69%, but we thought maybe it makes more sense to do one and maybe there'll be a blending strategy directly at Bloom Lake. So if we transpose that to Rana Gruber, is it the upgrade that is necessary because now we're only looking at 2 million tonnes? Or is it possible to take, let's say, 1 million of those tonnes, blend it with some 69% material and it becomes DR grade. So there's -- again, there's a lot of potential synergies between the 2 sites. Does it mean that we have to accelerate a DR transition at Rana Gruber? Or does it mean that we can work in a different space. We'll definitely look at what's the most accretive for our shareholders. Operator: There are no further questions at this time. I would now like to turn the call over to David Cataford for the closing remarks. David Cataford: Super. Thanks, everyone, for your support. Thanks for being on the call today and not looking at a gold analyst at this time. So yes, gold is definitely in favor, but I do think that the high-grade premium for our material is going to be extremely interesting in the coming years. When I look at our company, I mean, we're just coming out now of a 7-year CapEx cycle, roughly about $2.5 billion invested on time and on budget to create the foundation that we have now. And I do think that in the future, we'll be able to benefit from very good premiums and have a very interesting capital return strategy for our shareholders. So again, thanks, everyone, for your support and looking forward to speaking to you in the next quarter. Operator: Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.
Operator: Hello, everyone, and welcome to the Southwest Airlines Fourth Quarter 2025 Conference Call. My name is Jamie, and I will be monitoring today's conference call, which is being recorded. A replay will be available on southwest.com in the Investors section. [Operator Instructions] Now Danielle Collins, Managing Director of Investor Relations, will begin the discussion. Please go ahead, Danielle. Danielle Collins: Thank you. Hello, everyone, and welcome to Southwest Airlines Fourth Quarter 2025 Earnings Call. In just a moment, we'll share our prepared remarks, after which we will move to Q&A. Joining me today are Bob Jordan, our President and Chief Executive Officer; Andrew Watterson, our Chief Operating Officer; and Tom Doxey, our Chief Financial Officer. Before we begin, a reminder that today's session will make forward-looking statements, which are based on our current expectations of future performance, and our actual results could differ materially from expectations. Also, we will reference our non-GAAP results, which exclude special items that are called out and reconciled to GAAP results in our earnings press release. With that, I'll turn the call over to Bob. Robert Jordan: Thank you, Danielle, and good morning, everyone, and thank you for joining our earnings call today. We've been looking forward to 2026 when all the incredible work undertaken by the Southwest team will show dramatically improved results. First, however, a few comments on this past year and our fourth quarter 2025 results. The fourth quarter capped a year of meaningful transformation and accelerated execution at Southwest. We finished the year and the quarter strong for both revenue and cost, achieving full year EBIT of $574 million, which was above our prior guide of $500 million. Operating revenues of $7.4 billion for fourth quarter and $28 billion for the full year were quarterly and annual records. Our fourth quarter and full year results underscore that our initiatives are generating the desired results and provide great momentum as we head into 2026. We also ran a terrific operation, coming in #1 in on-time performance, completion factor and the lowest extreme delays in December and our strong operational performance throughout the year led to Southwest earning the top spot as The Wall Street Journal's Best U.S. Airline of 2025. I'm proud of the results, but I'm especially proud of our people who are the ones getting this done every single day, day in and day out. Before moving to 2026 and the exciting year ahead, I want to underscore some of the key initiatives that we successfully implemented in 2025, and here are the larger ones. We changed our product offering, including the implementation of bag fees, addition of a basic economy fare product and flight credit expiration, optimized our Rapid Rewards program, including variable earn and burn rates. Amended our co-brand credit card agreement with Chase, including new benefits and improved economics, launched free WiFi for loyalty program members in partnership with T-Mobile, expanded our online presence through new partnerships with Expedia and Priceline, outperformed our $370 million cost reduction target for 2025, including the first layoff of noncontract and management employees, added 6 new airline partners, launched Getaways by Southwest, added redeye flying, reduced turn time to increase aircraft utilization, deployed new technology to boost operational reliability, a key enabler of our top spot in the Wall Street Journal ranking of airlines, discontinued the fuel hedging program, completed $2.6 billion in share buybacks in 2025, representing about 14% of shares outstanding while maintaining our investment-grade rating. And on Tuesday, we implemented assigned and extra legroom seating, which required retrofitting over 800 aircraft. It is just a stunning list of initiatives undertaken by the Southwest team, all implemented on time and all delivered with excellence. In my 38-year career in this industry, I cannot think of another airline that embarked on so many fundamental changes to their business model and in such a short time, let alone, executed so well. The list of initiatives falls into 2 categories: one focused on offering a significantly better experience for our customers and the other focused on revenue growth and operational efficiency. Collectively, the large investments we have made result in a fundamental transformation and evolution of our business model while building on our core historic strengths. The largest domestic network, a strong balance sheet, unmatched customer loyalty to our brand, outstanding service and hospitality, low cost and operational efficiency, our unique culture and especially our unrivaled people. This transformation is expected to result in a significant step-up in how we grow earnings as compared to the past few years. And for 2026, we are forecasting earnings that are dramatically higher than 2025. For the full year, we are not yet guiding an EPS range. While being well above Wall Street consensus, we are providing EPS guidance that represents the lower end of our internal forecast. With that qualifier, we are guiding full year 2026 adjusted EPS of at least $4, which is materially higher than 2025 adjusted EPS of $0.93. Let me share our reasoning why we are not yet providing an upper range for 2026 earnings. Assigned and extra legroom seating became operational just 2 days ago, and we see earnings upside based on how booking behavior related to those initiatives unfolds, specifically upsell revenue from close-in bookings, which are more closely affiliated with business and price flexible customers. And second, we expect growth in both the business and leisure customer base driven by our new, more attractive product offering. We expect to have better visibility to the upside potential from these initiatives in the next month or two, and we'll provide range-bound EPS guidance when the current quarter results are reported, if not before. Also going forward, we plan to follow the industry norm of providing guidance to investors using broad company forecasts and results. This means we will step back from providing details and specific numbers around activities such as bag fees, assigned seating, the co-brand program and so on. I believe that Southwest 2026 earnings growth will stand out when compared to other major airlines. This is largely due to the nature of the many initiatives we have implemented, initiatives that were previously implemented by other airlines over the last decade or more, whereas the Southwest is implementing these initiatives now. And the work will not stop here. We see meaningful opportunities ahead to grow earnings from areas such as route network optimization under a backdrop of improved operating margins in the business, increasing our corporate customer base driven by product changes that better appeal to the business traveler. And this is a long-term journey, and we believe that executed well, we will see the rewards and additional cost takeout and efficiency efforts. We have an exciting year ahead as we continue to deliver for our customers and for our shareholders. I am incredibly proud of our people. They are the ones getting it done every single day, running a strong operation, serving our customers and transforming our company for the future. And with that, I will turn it over to Andrew. Andrew Watterson: Thank you, Bob. From a network perspective, Q4 capacity grew 5.8% year-over-year despite the fleet count being roughly flat year-over-year. Efficiency initiatives like reduced turn times and the introduction of redeye flying allowed us to maximize asset utilization while maintaining industry-leading reliability. For the full year, operating revenue increased 1.7% year-over-year, supported by initiatives kicking in and strong demand that drove both traffic and realized fares. My comment on realized fares reflects the effect of buy-ups from the changes we implemented. Fourth quarter RASM, which was impacted by the FAA mandated schedule cuts, was down slightly at negative 0.2% year-over-year. Building on the strong foundation, we're entering Q1 with momentum and confidence. We expect RASM to increase by at least 9.5% year-over-year, with contributions from yield, load factor, initiatives and loyalty programs. Q1 capacity is expected to grow between 1% and 2% year-over-year, even as we operate with approximately 7 fewer aircraft, a reflection of continued efficiency gains. Importantly, Tuesday marked the launch of 2 major product enhancements, assigned seating and our extra legroom offering. All aircraft conversions, technology development and employee training were completed on schedule. Customer response has been overwhelmingly positive. And these products are expected to be meaningful contributors to further revenue growth and customer satisfaction in 2026. I want to take a moment and reflect on the changes implemented 2 days ago. Overnight, we made the switch to assigned seating, implemented a differentiated service in our new extra legroom section and changed our boarding process. On Tuesday, we operated more than 3,200 flights as a different airline while continuing to deliver our usual high-quality operation, a testament to our incredible team. These initiatives aren't just enhancements, they represent a fundamental transformation in how Southwest delivers value to customers and shareholders. We're evolving our product to meet the needs of today's travelers while staying true to the Southwest brand. In summary, Southwest is executing with discipline and delivering results that position us for sustained success. Our operational reliability, product changes and strong demand trends give us confidence as we move into 2026. I'll now turn it over to Tom. Tom Doxey: Thanks, Andrew. We delivered a solid quarter with an EBIT of $386 million. We continued our strong cost performance with CASM-X up 0.8% year-over-year despite operating less capacity than initially planned. Our fourth quarter performance reflects the strength of the transformation underway at Southwest and reflects well on our evolving culture, one that is relentlessly pursuing new revenue streams and operational efficiencies in areas that in the past, we had not focused on. At the same time, we continue to invest heavily in our customers, our people and our technology to position Southwest for long-term success. Looking ahead, our initiatives, which represent a deep fundamental transformation of our business, are set to drive significant earnings growth in 2026. The impact from the initiatives launched in 2025 is well understood by us at this stage of the rollout, and we have confidence in our ability to deliver meaningful margin expansion and strong earnings growth this year. As Bob stated, for full year 2026, we are providing an adjusted EPS guide of at least $4, which represents the lower end of our forecast. For the first quarter of 2026, we are guiding an adjusted EPS of at least $0.45 per share, which also represents the lower end of our forecast and compares to a loss of $0.13 in the first quarter of 2025. We expect continued strong cost discipline with CASM-X projected to increase approximately 3.5% year-over-year, which includes approximately 1.1 points of impact from the removal of 6 seats from our 737-700 fleet to enable extra legroom seating. We plan to keep management headcount expense flat to 2025 levels in 2026, and we'll also be focused on operational efficiency within our frontline teams. Turning to fleet. Boeing continues to execute on its delivery commitments. We expect 66 Boeing 737-8 deliveries in 2026 and anticipate retiring 60 aircraft during the year. Full year net capital spending is expected to be in the range of $3 billion to $3.5 billion. In November, we issued $1.5 billion unsecured bonds at industry-leading terms. We ended the quarter with $3.2 billion in cash and a gross leverage ratio of 2.4x, both within our targets. During 2025, we repurchased $2.6 billion of shares and distributed $399 million in dividends. At the same time, we plan to make the necessary investments in our business while staying within the guardrails that support our investment-grade rating. In closing, 2026 is positioned to be a year of significant margin expansion and earnings growth for Southwest, and we remain confident in our ability to deliver and create long-term value for our shareholders. And with that, I'll pass it back to Danielle to start our Q&A. Danielle Collins: Thank you, Tom. This concludes our prepared remarks. We will now open the line for analyst questions. [Operator Instructions] Operator: [Operator Instructions] Our first question today comes from Catherine O'Brien from Goldman Sachs. Catherine O'Brien: So I'll listen to the rule, Danielle and ask my 2 questions upfront. So first question is, I realize it's very early innings on the rollout of your seat products, but I'm just trying to get a sense of how you're thinking about the upside to your base case you shared today. How does January booked RASM compare to 1 half February? And how do both of those time frames compare to that 9.5% base case guide? I'm just trying to get a sense of like what you're evaluating on potential upside. Is that higher upsell -- potentially higher upsell going forward, share shift, something else? I know that was a long for second one, I'll keep it quick. You beat your 4Q CASM guide pretty handily. What drove that? Anything shift out of the quarter we should be aware of as we model '26 CASM-X beyond 1Q? Robert Jordan: It's Bob. I'll take the first one, and then Tom will take the second. On the upper range, well, first, I would just say that bookings for everything related to our new products and initiatives all look really good. So everything is on track. We're just not ready to provide an upper range or upside today. I mean it's really simple. We've got lots of booking data related to the new initiatives, but we have limited data regarding close-in bookings and the behavior of fair upsell and seat ancillaries, especially with those. Close-in bookings, overweight business, and customers that are more flexible and that tends to have higher ancillary take rates. So we just need to see it. And by the way, I'm dying to know the upside as well and asking Andrew every day, but seriously, we will let you know as soon as possible. We just need a month or two to really see the potential. And then maybe separate from that, we're not stopping there. We have -- there's no victory lap. We have other things that we are focusing on above and beyond this potential with the current initiatives. I mean we have the opportunity for more cost takeout, efficiency, network optimization, with our new products, we think we can grow our corporate share. And of course, we're going to continue to optimize the revenue initiatives that we've just put in place. Tom Doxey: Catie, thanks for your question on costs. I'm really excited -- continue to be really excited about the way in which the entire management team is aligned and spending smartly and being efficient with our costs. There's no shift that we're talking about today out of 4Q into 1Q. So this is truly us going in and finding efficiencies in different areas of the business, and it's widespread throughout really every line item there, we're finding cost items. Operator: Our next question comes from Conor Cunningham from Melius Research. Conor Cunningham: Just on the load factor decline in 3Q -- sorry, in 4Q and then it just was larger than the decline in 3Q. Can you just help frame up what's happening there? I was under the impression that you were pushing for additional loads given this, the OTA distribution and so on. And within that comment, maybe you could talk about like is there a load factor target that you need to hit your bag fee target for 2026? And then my second question, sorry, I was hoping you could talk about the decline in the ATL. I realize that there's a revised credit, Chase agreement in there. But just if you could just frame up the drivers. I think that there is some concern out there in terms of like there being a larger decline from 3Q to 4Q and then you expect a pretty big revenue uplift in 2026. So just any thoughts around that would be helpful. Andrew Watterson: It's Andrew. I'll take the first one. And so I'd say that our employees are super engaged with the new Southwest. And it extends to our tech ops employees, and they did such a great job of retrofits of the aircraft overnight. They got so efficient that we were able to delay the -700 retrofits until January. Because in the -700s, as you probably know, we take out a row of seats. Now doing that late in the booking curves means there's limited revenue upside, but there is revenue upside, especially on the peak holiday travel dates. And extending that means that as we came out of it almost nil cost. And so doing that was EBIT positive. And so we don't manage the business for any kind of submetric of load factor or yield. We're largely managing for RASM or the RASM/CASM spread. And so in that situation, we chose a decision that maximized earnings but was unflattering perhaps the load factor, but it was the right decision. That's how we want to manage the company. Tom Doxey: And to your second question on ATLs, one of the benefits that we have now is we have more differentiation in our product and the ability to provide differentiation to those that are at different, different levels within the loyalty program is that more of the revenue can be recognized -- the loyalty revenue can be recognized sooner. Whereas previously, we had to wait, primarily the benefit that was derived from being in the program was when you would ultimately redeem points. Well, now depending on your status, you have the ability to derive a benefit. You may book a flight paying cash tomorrow where you have the ability because of your status to select a seat for free. You may have the ability to have a free bag or bags. So those are benefits that can be derived sooner. So that differentiation that we have in our product offering now allows us to recognize more revenue sooner. So obviously, that means that there is less that falls into that ATL category. So if anyone is looking at that ATL category and seeing that it's smaller and trying to forecast some sort of revenue weakness in the future, that's not what's happening. Operator: Our next question comes from Jamie Baker from JPMorgan. Jamie Baker: A couple for Tom. So with assigned seating broadly anticipated by customers, I'd have thought there might have been a surge in early bird bookings given that there's this significant ramp from the new initiatives. But I guess asked differently, wasn't there already a meaningful amount of early bird in the base? I just kind of thought people would have front-run the changes by protecting themselves with that. And then second, with so many changes at Southwest taking place, I recognize the team isn't going to rule anything out. But maybe for Bob, can you disclose if you have any aircraft RFPs in the market? This is not usually a state secret. Everybody knew Delta had a wide-body campaign and stuff like that. Just curious if you can comment on that. Robert Jordan: Yes, Jamie, although it's a quick one. I'll take the first, and then Andrew will take the second because it's quick. No, we do not have any active aircraft RFPs in the market, okay? Andrew Watterson: And then the other one, the early bird, we -- if I'm understanding your question correctly, we ceased selling early bird for departures after Tuesday. And so now people can get a good seat by buying the stand-alone ancillary. And we do see stand-alone ancillary accelerate close in, and that's the part that Bob talked about, we don't fully understand yet and expect to have in the next month or two more insights into how the booking curve ends for those higher fare passengers. Jamie Baker: Well, so maybe I misunderstood. I thought 4 weeks ago, somebody could have bought early bird to kind of avoid the seating fee. So that's not how it worked. Andrew Watterson: Not for departures on Tuesday, the 27th and beyond. All those were just seat assignment. We do have a kind of upgraded boarding, early boarding you could do, but we didn't really push it and promote it that much because we didn't want to add customer confusion. We will do that later, but that's a modest thing. The large money is coming from fare upsells, so buying a higher fare product or buying stand-alone ancillary. Robert Jordan: Jamie, I think the easy thing is upgraded boarding and early bird, the old ancillary ended on Monday with open seating and the new ancillary started on Tuesday from a revenue perspective, and that's the best way to think about it. Operator: Our next question comes from Scott Group from Wolfe Research. Scott Group: So just a couple of things. So big picture, usually when an ancillary goes up, fare goes down historically, what do you think is sort of different here? Is there any way to sort of share like what percent is going -- since Tuesday is going basic versus prior? And then maybe just, Tom, like a modeling kind of question, like I'm guessing January, you didn't have seats. It's the toughest comp. Like are we exiting the quarter with like RASM in the teens or something like that? Is that the implication of this guide? So I know there's a few, but thank you. Robert Jordan: Yes, I'll take the first one, and Tom will take the second. I think they're really disconnected. So ancillaries, especially now that a lot of that is a seat ancillary, which comes much later, it tends to be a separate decision from the fare purchase or the original booking and purchase of the ticket. So we don't see the correlation in terms of the ancillaries go up, the fare goes down. I mean all of this change, especially with the assigned seating and extra legroom is driven from a revenue benefit perspective by offering customers choice and then giving them buy-up opportunities at the time that they book and then giving them ancillary opportunities at the time, for example, when they select a seat. But no, we don't see that correlation at all that you're discussing. Tom Doxey: And to your second question, of course, we're not going to give RASM guidance by month, but it is a true statement that the extra legroom seats and the seat assignments, those enhance unit revenues. Operator: Our next question comes from Mike Linenberg from Deutsche Bank. Michael Linenberg: So 2 questions. I have a CapEx question for Tom and a revenue question for Andrew. So I guess, Tom, in the release, you did give us the CapEx number, although you indicated that it was a net CapEx number. So presumably, either -- I don't know if there's either sale leasebacks or there's aircraft divestitures. Can you give us a rough sense of maybe what the gross CapEx number is or maybe give us a sense of divestiture gains from aircraft sales in 2025? Tom Doxey: Sure, Mike. So we'll stick with the range that we've guided. There is an element of aircraft sales that are there that bring that down from the gross number. But we'll stick with what's out there in the public number as the net CapEx. Michael Linenberg: Okay. But it's specifically aircraft sales offsetting it. It's not sale leaseback gains or anything else? Tom Doxey: That's correct. Michael Linenberg: Okay. Great. And then just my question to Andrew. Segmentation, it's kind of a new thing. I mean, maybe you'll disagree with me, but I think it is somewhat of a new thing for Southwest. I mean, even in your commentary, you said that you're learning a lot about customer behavior. As we think about how things evolve, sort of what inning are we in? And what are the milestones that you're going to look for that things are really starting to pick up? And maybe as a kind of a teaser here, I know in the past, I recall you indicating that the majority of your bookings or tickets sold used to be in the lowest fare bucket. And I would suspect that, that's going to change, especially as people want the assigned seats and the extra legroom. Can you just give us sort of thoughts on how you see that evolving and maybe some of the key milestones? Andrew Watterson: Thanks, Mike. Yes, we're going from a kind of fare rule-based segmentation. We always had segmentation like device purchase and stuff like that to a product-based segmentation, which you can kind of pay more to get more. And so the question becomes who will pay more to get more from our current customer base. And we're seeing that our current customers who previously bought the kind of base product all in wanted to buy up. They wanted more from us. They wanted the ability to buy these extra product features. And even if they're buying early in the booking curve, they're willing to pay for them. And then of course, later in the booking curve, where most of those people are that are price flexible, you expect to see a kind of a surge of people demanding the higher products. And so we expect to go from like 80-plus percent buying the lowest fare product down to something half or less buying the very basic product. And so we don't know what that will look over the full booking curve for the full year to high season, low season, but we know that, that accelerates at the end, and that's kind of what we're waiting for. So the level of acceleration we see through the kind of February and March, where you have low season, high season will give us a really good idea of what the upside is for this. Operator: Our next question comes from John Godyn from Citigroup. John Godyn: Congrats on the big RASM guide. I wanted to just sort of reask it a little bit on the 9.5%. What is literally in that number and what isn't? It sounds like there's a low expectation of the ancillaries coming in, but it's not like you have 0. I just wanted to kind of understand really what's in there versus what could be upside. That's question one. And question two, it seems like there's a decent chance this year is an all-time high EPS annual year for you. When I look at the last time that happened, ASM growth was considerably higher. So as you get back to your return target, I'm curious how we should be thinking about a reacceleration in growth. Robert Jordan: Yes, I'll take the first one and then a combo, maybe Andrew, on the second one, especially thinking about capacity. Thinking about breaking down RASM detail, I mean, last year, just got a pause. It was just a fundamental transformation of the business model of this company. And it went extremely well. I'm so very pleased and proud of our people. And now all of that -- I mean, all these initiatives, they are the business. They are the new business of Southwest Airlines. It's not a set of initiatives any longer. And we're managing that way. And so everything in our 2026 guide include those run rates coming off of the implementation in '25 and then, of course, the assigned seating launch here on Tuesday. And that's just how we're managing the business. And we're focused even more beyond that on the additional upside, managing those initiatives and optimizing and then our incremental opportunities, again, like network optimization, further cost takeout, so we are moving to, as you obviously know, an EPS guide. Everything related to the initiatives and the run rates are baked in. And that's how we're thinking about managing the business, and we will provide the upside once we are able to quantify it. Andrew Watterson: And then on the growth, I mean, we're not thinking about any kind of crazy growth rates or anything like that. What we're thinking about mostly is in addition to whatever modest growth rates we choose is the reallocation of capacity. And so we have a product now that we see demand for that before we weren't offering. And then also the waterline for all of our markets rises with increased profitability. So we have a great opportunity to redeploy capacity within our current footprint to have less of a negative and more of a positive by moving capacity around. That's what we're really focused on over in the next 12 to 24 months. And we think that's upside to the numbers we've currently given you. Operator: Our next question comes from Duane Pfennigwerth from Evercore ISI. Duane Pfennigwerth: I wanted to follow up, Tom, on a comment you made about the loyalty -- faster loyalty rev rec. I assume there was a bump up with the bag fees and now another bump up with seats and extra legroom. So whatever the RASM tailwind was from rev rec in 4Q, it's likely larger now in 1Q. I wonder if you would frame how many points of your 10 points in RASM growth is due to rev rec policy changes? And then my follow-up, do you have any data or early learnings on receptivity of seats or maybe uplift in core Southwest markets versus maybe more jump ball markets where you have lower share? Tom Doxey: Thanks, Duane. We haven't quantified publicly what the change is there. There's a shift that goes where the split prior was part ATL, part other revenue. Now it's part ATL, some to other revenue and some to passenger revenue. But the exact percentages there, some of that relates to the way that our program is structured, and so we don't get into the details of that. Our Qs and Ks have a bit more color on it, but we don't go into the specific percentages. Andrew Watterson: On the second one, we find that the new product is giving us a strong tailwind in all of our markets. So it's not just a traditional Southwest stronghold where you see the benefit. It's across all customer segments and across all geographies, and that's what's really encouraging for us. Operator: Our next question comes from Tom Fitzgerald from TD Cowen. Thomas Fitzgerald: Just curious on the extra legroom fee. I think last fall, we had talked about that hitting its full run rate potential in the third quarter. Is that still the expectation as you sit here today? And then on the fuel side, I think at one point last year, Tom, we had talked about there being like a nice -- with bag fees, there being a nice fuel offset from the bag fee implementation. And I'm wondering if you started to see that this year. Andrew Watterson: Yes. I think previously in our guidance, we've given that we expect next year that we have the full run rate benefit of the seats. Obviously, we're endeavoring to get that faster. We know there's a ramp-up as customers adapt to it. That's also part of our discussion of the fleet upside. But right now, we're seeing a strong initial reaction, as I said earlier, both to buy-ups and seat ancillaries. Tom Doxey: And Tom, I love that you asked about fuel. Just last week, I'll brag a little bit about our operations team here. Just last week was in a meeting where we were walking through the full list of fuel savings initiatives that we have. You are correct. One of those is that as we carry fewer bags overall, which we knew would be a byproduct of the bag fee, there are fewer bags onboard the aircraft, and there is a fuel savings that comes from that. But there are so many other things that we're doing as a company, new technology tools that we have that are helping us as well as just the behavior that we have in our airports and our maintenance facilities to be able to save fuel. So often in this industry, we talk about CASM-X and it's appropriate. But fuel is a big expense, too. And we're doing a lot to become more efficient there as well. Operator: Our next question comes from Atul Maheswari from UBS. Atul Maheswari: Two questions. First, based on your implied RASM for the full year and based on what we've heard from others, it would appear that if you all hit your outlook, there might be a meaningful shift in airline revenues as a percentage of GDP this year versus the past few years. I know you can only speak for Southwest. So the question is, is the incremental revenues that you're generating this year, is that primarily coming from your existing customers who always wanted to spend more at Southwest but basically could not in the past since you did not have that offering? And that would explain why the revenue GDP equation moves to the right. Or is the incremental revenues that you're generating this year coming from attracting customers of other airlines, which would mean that the revenue GDP equation does not change much for the overall industry even as Southwest generates a significant revenue dollars. So that's question one. And then question two, in the at least $4 EPS target, what is assumed for macro, given Southwest is really the broader industry clearly lost good portion of revenues last year due to macro issues. So in that $4, what portion are you assuming that you get back? Robert Jordan: Yes, Atul, it's Bob. I can take both of those. Really, the -- what's in our guide for 2026 is it's the performance of the initiatives kind of on our current customer base. So there's no assumption, number one, of a big snapback in the macro, and there is no assumption number two of a big share shift. Now again, I do think with the far more attractive product offering, especially to our business customers, that is part of the upside that we can pursue over time. That's a longer journey, but I do think the product offering now certainly appeals more to everybody, but certainly appeals more to our business customers. So that is something we'll be attacking this year, and that provides additional upside. But no, to be specific, there's not a share shift in the calculation, and there's not a planned snapback in the economy in the macro. Operator: Our next question comes from Savi Syth from Raymond James. Savanthi Syth: Congratulations to the kind of Greater Southwest team on that #1 Wall Street Journal ranking, especially in a year that you've been kind of doing a lot of change. I know you're not providing kind of granular guidance, but I was curious, Tom, if you could provide color on CASM-X progression through the year. And particularly, is it fair that the 3.5% pressure in 1Q is maybe the high watermark, especially with capacity stepping up? And then maybe for my second question, on the corporate front, I'm curious what kind of corporate revenue growth you saw in 4Q and maybe what the trends are that you're seeing so far in 1Q? Tom Doxey: Thanks, Savi, and thanks for the shout out on the Wall Street Journal #1 ranking. That is a big deal. Another thing to brag about for our really great operations team and for our people. On CASM-X, we've given guidance for the first quarter. That will be -- we'll give guidance for unit cost and unit revenues during the quarters. And so it won't go beyond 1Q. But what I will say is that I feel like we have a good handle for what the costs are this year. It's been a couple of years now since we've had our labor agreements. Usually it takes a little bit of time for some of those costs to come in. And so now that we're a couple of years separated from that, and we've got, I think, pretty good view on what costs will look like for the year, and we're able to take that into account as we develop the full year EPS number that we've given to you today. Andrew Watterson: And for corporate, you pull out government, which was kind of volatile there in Q4, our corporate business is up mid-single digits. And then entering this year and in January, we had very high bookings that others have reported. So a very strong start to the year in corporate bookings. The benefit, though, as we talked about before, is the new product. We invested in our corporate infrastructure a while ago, a couple of years ago. We have now presence in the distribution channels. We have the sales force, the kind of BTN rankings about how well we are to do business is we're #2 just behind Delta. And so what's missing is the product that the corporate travelers want to buy. And frankly, the companies let them expense. And so having this new product, we will combine that with marketing efforts, our sales force efforts, incremental distribution efforts, and we think there's upside to our corporate business from this new product on top of the infrastructure we already built. Operator: Our next question comes from Andrew Didora from Bank of America. Andrew Didora: Andrew, I know you mentioned earlier that you obviously managed to RASM not a yield or load factor. But just curious like if you could give us any color on kind of how you're thinking about load factor, particularly here into 1Q. Obviously, you're coming off a pretty low base last year, I think around 74%. Historically, 1Qs are closer to 80%. So any thoughts around that would be helpful. And then for my second question, I know, Bob, you spoke to the opportunity for maybe some more cost takeout this year. Could you speak to maybe where that could come from and maybe how to think about CASM and cost opportunities in a 2% to 3% growth world? Robert Jordan: Yes, Andrew, I'll just give a start. The main point was a couple of things. I don't want anybody to think that we're done. I mean there's no victory lap here, as I said, there's a lot of hard work ahead. We're pleased with the momentum, but we are not done. This is a journey, and we're going to keep pressing on additional opportunities beyond the transformation that's been underway. So we took a lot of cost out last year, more this year. We doubled the original cost target. We did our first corporate layoff, which was tough. But what I can tell you is nothing broke. The company, if anything, is moving faster. There's more agility, more pace. And so I think that's been somewhat enlightening that we can press harder. And so there -- our corporate overhead will be down -- headcount will be down again this year. So I'm just admitting that we're going to press even harder on costs, on efficiency. So we're not ready to quantify anything yet, but just making sure that everybody understands that we aren't done with this transformation. We will be attacking other opportunities throughout the year. Andrew Watterson: I would say our teams, revenue management, marketing, we focus on revenue maximization. We don't get caught up in load factor yield. Now we -- our tools and our people now include the incremental upsells, we get an incremental passenger comes with a bag fee, a seat fee, other type of ancillary, that's included into our calculus. So quantitatively, that's in there, but they're all about revenue maximization, not going after the submetrics because that can really lead you down a bad path. And I think just look at revenue maximization, we have done a good job over the last 18 months of doing that, and we'll continue doing that going forward. Operator: Our next question comes from Ravi Shanker from Morgan Stanley. Ravi Shanker: Sorry to go back to the Jan 27 changes, obviously an important topic here. So I hit one topic with multiple questions. I think you said that it's going better than expected. A, can you confirm that? And b, can you -- do you guys know if both the incoming revenues and the book away are higher than expected? Or is the book away lower than you initially expected? And maybe second question on the same topic. Is there a risk that the ancillary revenues are higher out of the gate because people are maybe taken by surprise with some of the changes and maybe that normalizes over time? Or do you think it gets better from here? Andrew Watterson: I'll try to go through your questions there. So yes, the ELR and the preferred seats and assigned seats in general is going better than expected. We are getting book away from other carriers when they have poor reliability. We have that consistently over the last couple of years. So that is a tailwind. It doesn't happen every single day, but does happen quite frequently is a benefit and those people now come over and buy a stand-alone seat or a higher fare. So that's very helpful to have that extra book away. And then the ancillary, we find that what people do when they get to the gate, a crowded flight, they have a higher propensity to buy up. So you get to the gate, it's crowded and you're like,"Well, what seat am I? Oh, I want to change my seat, I will pay more." And so that we see the fuller the flight, the higher the ancillary benefit. Operator: Our next question comes from Sheila Kahyaoglu from Jefferies. Sheila Kahyaoglu: My first question, and congrats on the entire undertaking and the progress you've made. I'd love to hear what feedback you're getting on the product segmentation. Are customers even aware? How has that changed your promotional activity? And in cities like Chicago, where it's become a hot city of late, what really differentiates Southwest versus a network carrier? And maybe my follow-up on the $4 of EPS, what is the assumed paid load factor in total ancillary uplift in the extra legroom seats relative to the '25 base? Robert Jordan: Sheila, let me take a piece of the first one, and I think Andrew will take the second. What is different about Southwest Airlines now, obviously, has been a common question since we implemented assigned seating. And I've been here 38 years, and we have changed constantly over those 38 years. And every single one was, "well, you're just not the same Southwest." And every single time that person or those folks were wrong. So I just want to clear this up. I mean, our people and their heart for serving our customers, I mean, that is and always will be the greatest competitive advantage that Southwest has. That's the difference. That was true on Monday with open seating, and it was true on Tuesday with assigned seating and nobody, no other airline can copy the heart and the soul and the service of our people. So that's what makes Southwest Airlines different. Andrew Watterson: And I would say, in a place like Chicago, at Midway, we have a very strong network. And so our offering to customers where you want to go, we have the strong network there. Price, we have lower cost than our competitors, and so we can offer great deals. Conscious, we're still pushing RASM. With lower cost, we can push great deals. Reliability. Now airlines talk about reliability, but it's extraordinarily difficult to copy. And the fact that we have much higher reliability than any airline in Chicago, customers can count on coming to Midway and having a much better reliability than over at O'Hare. And then hospitality, once again, everyone says their employees are the best. But guess what, look at NPS scores, our employees really deliver great hospitality and a high score. And it's extraordinarily difficult to copy. You can tell your people to treat customers better. But if they don't, what do you do? For us, our customers -- our employees want to treat customers well. And so these are durable advantages of having great hospitality and great reliability. Operator: Our next question comes from Brandon Oglenski from Barclays. Brandon Oglenski: Congrats as well. I think I'll just keep it to one here. But Bob, I mean, I think just judging by some of these questions and definitely like the bloggers and the airline observers out in the ecosystem, there's this view, and I think you've hit on it in the answers to a couple of these questions, but like Southwest is losing its uniqueness, no more free bags and now it's or maybe less egalitarian. But the reality is, I think if we listen to all your competitors, things have moved much more towards a premium focus with consumers. So I don't know, can you just maybe wrap this up a little bit? Like isn't this just offering the market what they wanted? And incrementally, I think you hit on the culture, too, but has the employee base really fully embraced this, too? Robert Jordan: Brandon, thank you. And yes, this is about one thing, and that is chasing our customer. We are committed to following the customer, providing what they want today, which is different than what they wanted 5 and 10 years ago and what they want in the future because we know if Southwest Airlines doesn't provide it, they're going to go to a competitor, and we are not going to let that happen over time. So this is complete -- this has nothing to do with copying anybody. This has to do with offering our customers what they want. And then as Andrew said, doing it even better because we've got the employees and the service delivery and the reliability that they cannot match. I mean, just look -- I'm not meaning to brag, but maybe I am, but we won the #1 ranking in the Wall Street Journal Best U.S. Airline for 2025 for a reason. That's because our service was better, our operation was better and customers see it. And again, at the high level, we are on track. I mean, you see the numbers that we're guiding for 2026. So we're seeing customers embrace the changes, book the product. We are not seeing book away from Southwest Airlines. If anything, we're encouraged that we'll see share shift to Southwest Airlines because the product is a stronger offering now, especially with corporate. So again, this is all about following the customer. Operator: Our next question comes from David Vernon from Bernstein. David Vernon: Great. Maybe, Bob, just to kind of build on that idea, right, you're going to be taking share, raising fares by something in the double digits. Like normally, you would think there'd be some sort of demand elasticity problem in that math. Why isn't that the right way to think about this? Why isn't the big risk here that you put all these changes in, customers get used to them and then eventually, they can just look across other airlines and maybe you're more expensive and you see some of the expectation for what you're going to get in the unit revenue growth competed away because it is still a pretty competitive market as far as we look at it anyway. Any thoughts on the.... Robert Jordan: Yes. And thank you. Again, it's not -- this is not about raising fares. This is about offering our customers choice that we know that they want. So offering them a very basic fare if that's what they want, offering them a fare that comes with extra legroom and a drink and a different level of service and boarding, if that's what they want and a lot of products in between. So it's the customer's choice to buy up, which is very different than sort of across the board raising fares. Same thing on the ancillary side, just like we sold early bird and upgraded boarding. We're offering our customers a choice around priority boarding and obviously a choice around seat selection. So this has nothing to do with raising the fares. This has to do with offering customers choice that they can then choose to buy or not buy. And what we are seeing is that they are choosing to buy those new options. Operator: Our next question comes from Dan McKenzie from Seaport Global. Daniel McKenzie: First, huge congrats to the entire company for pulling off, I think, what most thought couldn't be done. But a couple of questions here. First, the 50% of the tickets that are sold with the buy-up feature, my question really is what percent of revenue does this account for? What would you expect it to account for once you're at maturity? And then secondly here, if corporate bookings are up high single digits or double digits, what fares are they replacing? My guess is they're displacing the $39 fare. And then just related to that, corporate, I'm just curious if the CapEx guide embeds new lounges. Andrew Watterson: So on the buyout, that's the type of stuff that we are working out that Bob is bugging me for all the time. And so we're not going to give those right now. It will become clear over time as we give the high end of our guide and we start to report. But right now, we're just focused on delivering the current guide. In corporate bookings, we found that the kind of segmentation, we introduced the basic fare that the corporates found that they did not want that in their ecosystem. So our sales force did a great team of helping configure selling tools so that, that was not featured and that was beneficial to our corporate revenues. And as we offer these ancillaries, we'll be doing the same thing, and we anticipate additional benefit once the tools and expense policies calibrate to our new offerings that we'll see additional benefits from that. Robert Jordan: And Dan, just quickly on the lounge question. I think I mentioned before there, obviously, we're looking at, again, things that our customers want. There's nothing specific to report there today, but just know that the assumptions that we have internally around what that could look like are built into our guide. So they're not incremental to the guide that we've given you for the quarter or for the year. And I want to go back to your first sentence. I just can't help myself about the congrats on the implementation. I just want to say thank you. And I got to thank our people again. The level of execution last year with so many things. It was just done so flawlessly on time with quality and to be able to win the Wall Street Journal #1 ranking at the same time you're changing the company then to have a winter storm that's historic and manage it incredibly well, come out of that with no hangover at all. And by the way, the next day, do the largest changeover in the history of the company with assigned seating and to have excellent operating metrics on that day. I just don't know how to say anything, but wow, I'm just stunned by what our people have done. Operator: And our next question comes from Chris Wetherbee from Wells Fargo. Christian Wetherbee: I guess I wanted to talk a little bit about the business commentary and I guess what you're looking to see over the course of the next couple of weeks. Presumably, there's been some conversations there and you seem optimistic about upside. So any insight there would be helpful and maybe where some of the share might be coming from? And then the second question would just be sort of understanding what's embedded in the $4-plus guidance around buybacks. Andrew Watterson: On the first one, I would separate out the two things between, one, the -- what we see as the upside from the ancillary sales and the buy-up those are the normal booking curve management and what we expect to see there through the low season of February and the high season of March. That will help us understand better what the upside potential is in the short term. What's not in our guide is this kind of medium-term benefit from increased corporate share or increased corporate revenue as people buy our ancillaries on the company dime. And so that is something that will unfold over medium term and is not in our guide. Tom Doxey: On the buyback question, we continue to believe that the shares are undervalued relative to the long-term fundamentals of the business. And so we'll continue to be opportunistic there, and we'll make sure that we stay in the guardrails that keep us with our investment-grade rating. And one other thing I'll add to that, too, is we've invested a tremendous amount of capital into our people and into our business as well and into our customers. And we've talked about the investments we made into the cabin and things like the bigger bins and the new lighting and the new seats and the in-seat power and free WiFi. And all of these things are part of that capital allocation as well. And so we stay within the guardrails. We invest in the business. We invest in our people, and we invest in our customers and ensure that we stay in those investment-grade guardrails. Operator: Our next question comes from Jamie Baker from JPMorgan. Jamie Baker: Thanks for squeezing me in at the last minute. So the earlier comment about passengers making buy-up decisions at the gate, have you padded your turn times to account for that? Is there any sort of operational impact from that phenomenon? Andrew Watterson: Actually, we took turn time out, Jamie, and -- so all this is, we've scripted out what we sell when and what happens when in our boarding. We have standards and those allow us to handle both employees traveling for non-revenue as well as upselling in the gate area. And so all of that, I think, works well for cost efficiency and revenue optimization. Robert Jordan: And I've got to just add again. I mean we took time out of the turn, managing all these changes, which include changes to boarding, and we won the Wall Street Journal ranking as the Best U.S. Airline, most of which are operational metrics. I mean, not bad. Danielle Collins: And on that note, we'll conclude today's call. As always, if you have any follow-up questions, please reach out to Investor Relations, and we appreciate everyone for joining. Operator: Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.
Operator: Good morning, everyone, and welcome to the United Rentals Investor Conference Call. Please be advised that this call is being recorded. Before we begin, please note that the company's press release, comments made on today's call and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control. And consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the safe harbor statement contained in the company's press release. For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K for the year ended December 31, 2025, as well as the subsequent filings with the SEC. You can access these filings on the company's website at www.unitedrentals.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations. You should also note that the company's press release and today's call include references to non-GAAP terms such as free cash flow, adjusted EPS, EBITDA and adjusted EBITDA. Please refer to the back of the company's recent investor presentation to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure. Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer; and Ted Grace, Chief Financial Officer. I will now turn the call over to Mr. Flannery. Please go ahead, sir. Matthew Flannery: Thank you, operator, and good morning, everyone. Thanks for joining our call. As you know, in 2025, we again committed to doubling down on being our customers' partner of choice. This translates to working hand-in-hand with our customers to provide an unmatched experience across our one-stop shop of gen rent and specialty products, coupled with industry-leading technology and a world-class team. Ultimately, this all culminates in our value proposition, which not only improves the customers' productivity and efficiency, but also positions us to outperform the market. I'm pleased that our team's steadfast dedication to this commitment, in addition to an unwavering focus on safety and operational excellence resulted in another year of record revenue and EBITDA, as you saw in our results reported yesterday afternoon. Today, I'll start with a recap of our fourth quarter and full year 2025 results, followed by our expectations for 2026, which we expect to be another year of profitable growth. I'll keep my remarks brief before Ted reviews the financials in detail, and then we'll open the line for Q&A. So let's start with the quarter's results. Our total revenue grew by 2.8% year-over-year to $4.2 billion. Within this, rental revenue grew by 4.6% to $3.6 billion, both fourth quarter records. Fleet productivity increased by 0.5%, contributing to OER growth of 3.5%. Adjusted EBITDA came in at $1.9 billion, resulting in a margin of 45.2%. And finally, adjusted EPS came in at $11.09. Now let's turn to customer activity. We again saw growth across both our gen rent and specialty businesses in the quarter. Specialty continues to exhibit healthy and broad-based growth. We remain focused on expanding our specialty footprint and capitalizing on the geographic white space available. In 2025, we opened an additional 60 cold-starts, including 13 in the fourth quarter. Importantly, we remain confident that the combination of geographic expansion, the power of cross-sell and the addition of new products to our portfolio will enable us to continue growing our specialty business at a double-digit rate for the foreseeable future while also expanding our competitive moats and providing attractive returns. By vertical, our construction end markets saw growth across both infrastructure and nonresidential construction, while our industrial end markets saw particular strength within power. Similar to last quarter, data centers and power were drivers of growth, but certainly not the only ones. Our project pipeline is larger than ever, and we saw new projects kick off across health care, pharmaceuticals and infrastructure to name a few. Now turning to the used market. We sold $769 million of OEC in the fourth quarter at a 50% recovery rate. For the full year, we sold slightly less OEC than we originally forecast as we held on to some high-time used assets to meet demand. Importantly, the demand for used equipment remains healthy. For the full year, we spent nearly $4.2 billion on a combination of maintenance and growth rental CapEx, which resulted in a free cash flow generation of $2.2 billion for a free cash flow margin of 14%. I'll say it again, as I do every quarter. The combination of our industry-leading profitability, capital efficiency and the flexibility of our business model enables us to generate meaningful free cash flow throughout the cycle and in turn, allocate that capital in ways that allow us to create long-term shareholder value. In 2025, specifically, we allocated capital as we always do, first by funding organic growth and then complementing this with inorganic growth. We then return our remaining cash to shareholders. In 2025, we returned nearly $2.4 billion of excess cash flow to shareholders through a combination of our share buybacks and our dividend. Looking forward, I'm pleased to share that we plan to repurchase $1.5 billion of shares in 2026 and to increase our quarterly dividend by 10%, reflecting our third consecutive annual increase since introducing our dividend in 2023. Now let's turn to our 2026 guidance, which implies total revenue growth ex used of over 6%. This is supported by customer sentiment indicators, solid backlogs and most importantly, feedback from our field teams. In many ways, we expect the construct of demand in '26 to be similar to last year with large projects and dispersed geographic demand driving most of our growth. We'll remain focused on capital efficiency, but repositioning costs will likely remain elevated. Having said this, we're very aware of the importance of profitability and margins. Our guidance, which implies flat margins at the midpoint ex the benefit of the H&E termination fee last year, embeds cost actions we're proactively taking to improve our efficiency and support profitability. We all know yesterday's touchdowns don't win tomorrow's games. Our culture of always wanting to do more and never being satisfied with the status quo is in our DNA. This was on full display a few weeks ago when we held our annual management meeting in St. Louis. We brought together almost 3,000 team members to both celebrate our wins and to find new ways to be an even better partner to our customers as we look to outperform the end market while having an even greater focus on efficiency and profitability. We have an incredible team at United Rentals with a culture that is unmatched in our industry. This is a real differentiator and gives me confidence we can take our momentum and continue to build a best-in-class company. I'm proud to say that the team walked away from the meetings energized and ready to deliver on the expectations our guidance reflects. In closing, I'm excited for what lies ahead for United Rentals. Our team puts customers at the center of everything we do, which positions us well in both the short and long term to capitalize on the opportunities ahead of us and to continue to outpace the industry. Our strategy, business model, competitive advantages and capital discipline allow us to generate compelling shareholder returns for the long term. With that, I'll hand the call over to Ted, and then we'll take your questions. Ted, over to you. William Grace: Thanks, Matt, and good morning, everyone. As Matt just shared, we were pleased with a number of our achievements in 2025, including full year records for total revenue, rental revenue and EBITDA, strong free cash flow and attractive returns as we navigated through some of the unique dynamics woven into the current demand backdrop. Looking more closely at the fourth quarter, we were pleased with our core results, which were partially offset by shortfall in used volumes and some choppiness in our matting business, which I'm sure we'll talk more about this morning. So with that said, let's dive into the numbers. Rental revenue increased $159 million year-over-year or 4.6% to a fourth quarter record of $3.58 billion, supported again by growth from large projects and key verticals. Within this, OER increased by $97 million or 3.5%, driven by 4.5% growth in our average fleet size and fleet productivity of 0.5%, partially offset by assumed fleet inflation of 1.5%. Also within rental revenue, ancillary and re-rent grew by over 9%, adding a combined $62 million as ancillary growth continued to outpace OER. Moving to used. We generated $386 million of proceeds at an adjusted margin of 47.2% and a 50% recovery rate on $769 million of OEC sold. This brought our full year OEC sold to $2.73 billion, up slightly from 2024, but a bit below our guidance of $2.8 billion as we held on to high-time used fleet in certain categories. Taking a step back, at this point, we think the used market has normalized coming off the extremes we saw in 2022 and 2023, and we do expect 2026 to see healthy demand. Importantly, though, we're at recovery rates that will continue to support strong unit economics across the life cycle of our fleet. Turning to EBITDA. Adjusted EBITDA came in at $1.901 billion with a $33 million increase in our rental gross profit dollars more than offset by a $39 million decline in used gross profits due primarily to the shortfall in volumes that I mentioned. On a dollar basis, SG&A ex stock comp was flat year-on-year, translating to a 20 basis point improvement as a percentage of revenue, while other non-rental lines of businesses added $7 million. Looking at profitability. On an as-reported basis, our fourth quarter adjusted EBITDA margin was 45.2%, implying 120 basis points of compression or 110 basis points, excluding the impact of used. We continue to see the same market and margin dynamics play out in the fourth quarter that we experienced all year. From a cost perspective, the biggest of these was again elevated delivery expense, driven largely by fleet repositioning costs, which we'd estimate provided roughly 70 basis points of headwind in the quarter. Beyond that, growth in ancillary is roughly another 20 basis points of headwind, while we also continue to manage through above-trend inflation in a few notable areas, including facilities and insurance. As you heard from Matt, we expect the demand construct in 2026 to look similar to 2025. We expect that most of our growth will again be led by large projects at the same time that our strategy to provide products and services to our customers is likely to drive outgrowth in ancillary revenues. With that said, our entire team is working hard to mitigate the headwinds this presents to overall margins as strategically, we continue to believe that providing our customers with these additional services is an important competitive advantage and helps drive higher OER growth. Shifting to CapEx. Fourth quarter gross rental CapEx was $429 million, bringing our full year total to $4.19 billion. Moving to returns. Our return on invested capital of 11.7% remained comfortably above our weighted average cost of capital. And turning to free cash flow, we generated $2.18 billion, translating to a healthy free cash flow margin of 13.5%. Our balance sheet remains very strong with net leverage of 1.9x at the end of December and total liquidity of over $3.3 billion. This was after returning $2.4 billion to shareholders during the year, including $464 million via dividends and $1.9 billion through repurchases. Combined, this equated to a little better than $37 per share. Now let's shift to the updated guidance we shared last night, which reflects our confidence in delivering another year of solid results. Total revenue is expected in the range of $16.8 billion to $17.3 billion, implying full year growth of 5.9% at midpoint. Within this, I'll note that we're guiding used sales to roughly $1.45 billion on OEC sold of around $2.8 billion, implying total revenue growth ex used of 6.2% at midpoint. Our adjusted EBITDA range is $7.575 billion to $7.825 billion. Excluding the H&E benefit in 2025, this implies adjusted EBITDA margins of flat at midpoint year-on-year. Importantly, this guidance embeds actions we will be taking in 2026 to offset the cost dynamics I mentioned earlier and speaks to our focus on protecting margins as we work through some of the unique factors facing us until local markets rebound. And from a cost perspective, we're better able to leverage the efficiencies that our network density will provide. On the fleet side, our gross CapEx guidance is $4.3 billion to $4.7 billion, an increase from 2025 of approximately $300 million at midpoint. This reflects our confidence in the market in 2026 and beyond. Net CapEx is expected in a range of $2.85 billion to $3.25 billion. Now within all of this, we take our 2026 maintenance CapEx at around $3.4 billion, implying growth CapEx of roughly $1.1 billion at midpoint. And finally, we're guiding to another year of strong free cash flow in the range of $2.15 billion to $2.45 billion. Shifting to capital allocation. As always, our priority is to fund profitable growth, whether it's organic or through M&A. Following this, we focus on deploying surplus cash flow in ways to maximize shareholder returns. With that in mind, we are again increasing our quarterly dividend per share by 10% to $1.97, translating to an annualized dividend of $7.88. Additionally, we intend to repurchase $1.5 billion of common stock in 2026, supported in part through our new $5 billion share repurchase program that is intended to enable buybacks for the next several years. So in total, we intend to return roughly $2 billion to shareholders this year, equating to approximately $32 per share or a return of capital yield of about 3.5% based on our current share price. So with that, let me turn the call over to the operator for Q&A. Operator, please open the line. Operator: [Operator Instructions] We'll go first this morning to Steven Fisher of UBS. Steven Fisher: I wanted to just ask you, Matt, maybe a bigger picture question on ancillary services. Using the, I guess, the baseball innings analogy, where do you think you are on the evolution of this? Is this sort of like the second or third inning where you have a much wider breadth of services left to offer here? Or are we more like kind of sixth to seventh inning and it's a more targeted list? And I guess what's the message around the ROIC on these additional sources of EBITDA and points of customer service? Matthew Flannery: Sure, Steve. It would be hard for me to characterize because I don't know what other products or services we'll add in the future, right? It depends on -- because we need to do them at scale. So it depends on finding if we're going to add additional services to the portfolio, which usually come along with products, right, new products that we're offering, when or how fast that's going to happen. But I will say that our goal overall is to continue to have as many solutions for the customer as possible. We're a big believer in one-stop shop. We know that our partners want someone that could do as much for them as possible to consolidate their vendor base and to have strong services throughout the network of what they need, and that's going to be our driver. As far as the ROI on these, just one thing to remember, although these may be margin dilutive, most of these services, if not all, are not capital intense. So this net-net on a cash perspective, these are profitable. They just dilute margins. We're not doing work for free. But at the same time, it's very much connected to the fleet that we rent. So it's important that the more we separate ourselves by doing these extra services for the customer is a big important part of our strategy. Steven Fisher: Very helpful. And then maybe just on M&A and the pipeline. It looks like you did some smaller deals in the fourth quarter after a quiet few quarters. Can you just talk about kind of what you added in the quarter? And then just curious how active the pipeline is? Did you continue any activity here in the first quarter? And what sort of the range of size of deals you'd consider here? Are there any sort of chunkier deals that you could still do? Matthew Flannery: Yes. So on the latter part of your question, the pipeline is pretty robust. And there's some chunky deals in there, right, specifically when we're looking at opportunities in specialty. But the deals that we did at the end of the year here in '25 were pretty small deals, to your point. We did one trench deal. We did a portable sanitation deal, a very small one to help fill out the footprint. And we did fill out -- we bought an aerial company in Australia to fill out that product offering, which will help those folks continue to serve more -- have more solutions for their customers there. But no impact -- not a large impact numerically, but strategically, they all tie in. And as far as what we're going to do in '26, we worked a very robust pipeline this year. We didn't get -- we got 3 over the transom at the end. It's really more about finding the right fit, finding the right partner. And at the end of the day, the math has got to work. So we're pretty picky there, but there's plenty of opportunity. It just -- it's got to fit for us strategically and financially. Operator: We'll go next now to Jerry Revich of Wells Fargo. Jerry Revich: Ted, I'm wondering if you wouldn't mind unpacking the comments you made within specialty. You mentioned there's some variance in the portfolio on Matting. Can you just talk about the growth trajectory for the businesses, which ones are tracking better? And any additional color you want to provide on Matting would be helpful. William Grace: Yes, yes, absolutely. Thanks for the question. So we saw broad-based strength in specialty again. Matting was affected in the quarter by a pushout of really one particular project that we had expected would benefit the fourth quarter. It's a large pipeline project that simply has been pushed out. So we've got the Matting contract. We know we're going to be on it and the pipeline itself is moving forward. But that was certainly something that we had not expected, and that's just the nature of some of the large projects they do, I'd say, in their specific verticals that can move. Otherwise, every vertical was up in specialty, very pleased with the results. And going forward, just as you think about Matting, on a pro forma basis, that business was up 30% for us in '25. It was up 55% as reported. When we bought Yak, we said our goal was to double the business within 5 years, and we're very happy to report that we're ahead of plan, and we've been very happy with the business. It's going to be a little lumpier, right? And they can have just the effect of timing shifts, and that's really what you saw in the fourth quarter. But as I said, we've been super pleased with the acquisition and the growth, the returns that that's providing, and we're really optimistic with the outlook there, both within their kind of core products or end markets, pipelines and transmission lines, but also as we extend those products into other verticals. Matt, would you add anything? Matthew Flannery: No, well said. The team is doing a good job, just a little lumpier than what you folks are used to seeing from us. Jerry Revich: Okay. Super. And then can I ask in general rental, we're seeing really strong demand for earthmoving equipment, but aerials really lagging. Is that a function of the large projects and data centers being less aerials intensive? And curious if you're seeing based on your customer checks an inflection in starts in retail and office that could be interesting as we head through '26. Curious what you're seeing on those fronts. Matthew Flannery: Yes. We're actually not experiencing that, Jerry. We've been pretty strong in our aerial usage and growth and really the whole project -- product portfolio has been strong. So we're not seeing a delineation there, separation between the dirt and the aerial. Maybe on the OEM side, there's some stuff going on that you're referring to, but we're not seeing it in our customers' demand needs. William Grace: And then, Jerry, in terms of your question about kind of office and retail, I can't -- I mean, there are projects that kind of come across the transom. I don't think we've seen any inflection. I would say, overall, the outlook for commercial is probably going to be relatively muted, and it's other areas of the nonres that are really going to drive -- continue to drive what we think will be strong growth. Operator: We go next now to Angel Castillo with Morgan Stanley. Oliver Z Jiang: This is Oliver on for Angel today. I was just curious on fleet productivity. Can you guys talk about what drove the year-over-year improvement this quarter? And if it's possible at a high level, what your outlook implies directionally for those factors, rate and time for 2026? Matthew Flannery: Sure, Oliver. So when we look at the 0.5% fleet productivity in Q4, there's a couple of things that I knew we need to handhold here because some things that aren't as apparent to you guys. So qualitatively, when we think about the construct of that, our full year fleet productivity was 2.2%. We're very pleased with that. That shows that we're outpacing the inflation. And just in the most simple terms, we're growing our rent revenue faster than we're growing our fleet. That's really what we're measuring here. In Q4, we had some impact. So if I think about the 2.0 that we had in Q3, which was more like a full year number versus the 0.5% in Q4, when I look at the factors, rate was positive. As a matter of fact, almost on top of each other of the benefit that we had from rate in Q3 versus Q4 in this we're exactly the same. Time was slightly less positive than we had in Q3. So that was a little bit of a drag. The big number here and why we're talking about it is mix. So just the Matting choppiness that Ted talked about, which is all bulk. That's why it shows up in mix. Those aren't serialized assets for those mats. That alone change from Q3 to Q4 was worth a point of fleet productivity. So that's the big mover there. We usually, frankly, wouldn't talk about an individual business segment, but we understand that this is unique and it was such a needle mover that we wanted to talk about it. Once again, pleased with the Matting business, but that lumpiness and because it's all bulk had a big negative mix impact on our fleet productivity. Otherwise, we would look much more similar to our full year and our Q3 numbers. Oliver Z Jiang: Got it. Understood. That's really helpful. And then maybe just one more, switching gears on competitive dynamics. I mean we were just curious if you've seen or heard any changes on the ground in terms of having a competitor recently IPO, whether that's potentially a positive or negative impact for you guys now and also longer term? Matthew Flannery: Yes. So a little bit different, right? As you can imagine, between Wall Street and Main Street here. That change of where they get their funding doesn't really change anything on the Street. We think the supply-demand dynamics are good. We think that's why you had asked earlier about what's implied. That's why we -- in our guidance. That's why we still expect to have positive fleet productivity next year. We understand the competitive nature of the industry, but we think the important part of it and probably being public will help that even more. We think the most important part of it is that the industry needs to continue to be disciplined because we've all absorbed price increases on fleet for the past few years. So the importance of the components of fleet productivity are still important, getting good utilization, getting strong rate improvement. These are all things that are must for the rental industry and certainly something that we are focused on, and we believe the industry is as well. Operator: We go next now to Jamie Cook with Truist. Kevin Wilson: This is actually Kevin Wilson on for Jamie. I wanted to ask about cold-starts. I think you're expecting 40 specialty cold-starts in 2026, which is healthy, but down a bit from the number you had 2025 and 2024. I am wondering if you could speak to the strategy there and just your strategy around the footprint over the medium term in the context of revenue growth coming from more geographically dispersed customer demand, maybe where you're finding the strongest opportunities for organic growth? Anything on the verticals within specialty you're targeting for those cold-starts this year? Matthew Flannery: All right, Kevin. So I'll take them one piece at a time here, and you'll have to remind me later if I forget. So the cold-starts specifically -- that's okay. The cold-starts specifically, we don't really look at these as we tell you about them on a calendar year, but I wouldn't read anything into the 40 versus the 60. I think we originally targeted 50 for 2025, and the team got ahead in the pipeline, but there continues to be a pipeline of markets they want to enter. And where that number ends up has to do with where do they find the right real estate and talent to open it up. And most of this is continuing to expand our one-stop shop, right? So most of these cold-starts are in specialty offerings, filling in the white space, specifically for one of the -- some of the new product lines. So we feel really good about that. As far as where is the organic growth coming from and we think about -- it's all the end markets we've talked about. We believe that the construct, as Ted had said earlier, of demand in 2026 is going to be similar to what it was in '25, where the large projects and specialty are going to drive most of the growth. We think that plays into all of our product lines. That's the whole point about the one-stop shop offering is that's going to create growth for gen rent and specialty. And outside of that in the verticals, it's the same stuff you guys would see. Power is still really strong. Nonres has been very resilient and strong. Even if you pull data centers out of nonres, it's still positive, strong. So we feel really good about that. And the ones that are still dragging would be the residential, which is not a big part of our portfolio and a little bit of petrochem, whereas I think you see the rig count in Q4, if I believe my memory is correct, was down 8%. So outside of that, there's nothing specific I'd call out. Kevin Wilson: That's helpful. And then just a follow-up on that with the growth coming from large projects. I guess like what can you -- what's embedded in the revenue guide in terms of local market demand? Can we still call that flattish, which is, I think, what you said last quarter? Or just what's your level of visibility? Matthew Flannery: Yes. Yes, you're on it, Kevin. We still think that's -- and it will vary market by market. But overall, in generality, we'll call that flattish. And with most of the growth, as I said in my opening remarks, coming from the big projects. That pipeline is as big as it's ever been in my 35 years. So it's going to be more of the projects, and this does not contemplate a big rebound in the local markets. But to be fair, not a deterioration as well. We think steady as she goes in the local market. Operator: We'll go next now to Kyle Menges with Citigroup. Randi Rosen: This is Randi on for Kyle. You guys mentioned that you guys alluded to another strong year of growth in large projects. I mean I'm just wondering, based on your recent conversations with customers and what you're seeing in the market, in your mind, what inning do you think we're in, in terms of this mega project spend? I mean it sounds like it's going to be strong this year, pretty strong this year, but more of a longer-term outlook would be super helpful in terms of how spend could go over the next couple of years. William Grace: Yes, I'll start there, Randi. I'd say the outlook for the so-called mega projects is very healthy. It's certainly hard for us to judge what inning we're in, but we certainly don't think it's later innings. And we base this on a lot of things. But frankly, we've got a pretty broad assortment of drivers within large projects. So we've talked about infrastructure. We've talked about stuff within technology. We've talked about power, certainly data centers. But at this point, we're kind of following, call it, 6, 7 or 8 tailwinds that we've been talking about for years. And when you aggregate the dollars that are expected to be invested in those areas, we think there's a very healthy amount of runway ahead of us. Randi Rosen: Got it. That's helpful. And then I guess just in reference to some of the cost actions that you mentioned in your prepared remarks to offset some of the headwinds this year. Can you just give us some color on some of those actions you're taking and what you might expect those to contribute to margins this year? Matthew Flannery: Yes. So we probably won't call it the contribution, but it's all embedded within the guidance. But what we're -- one of the areas you can imagine, we're really focused on is we've talked all year about these repositioning costs. Well, if large projects are going to keep driving the growth, we're still going to have those, but we've got a lot of actions in place. How can we mitigate those? How can we do it better? We can't eliminate them. It's part of driving great fleet efficiency and fleet productivity is moving those assets to places where the work is, but we're going to -- we got more eyeballs on it and we put some more tools in place. And then just any other hard cost actions we could take to help the team. So we'll talk about that as we achieve them as we go along. But we feel good that we've got an action plan in place to protect our margins and to make sure regardless how demand shows up, we -- as we said earlier, we believe in profitable growth, not growth for growth sakes, and we're going to make sure the team is focused on protecting margin here in '26. Operator: We'll go next now to Tim Thein with Raymond James. Unknown Analyst: Tim on for Tim here. So on the fleet productivity discussion earlier, I guess, kind of another reminder of some of the challenges of interpreting that number from the outside. But just is it -- and maybe I missed it earlier, but in terms of the plan for '26, just in terms of how you see the year playing out, it's still Matt, the expectation that your ability -- or you have the ability to outgrow that assumed inflation. Is that within the targets for '26? Matthew Flannery: Yes. Yes. Embedded in that guidance is that expectation that we'll at least reach that 1.5% hurdle. And where we end up in the guidance and where we end up on that will -- that deconstruct the revenue will be the answer. We might have some lumpiness, not -- hopefully not as severe in Q1 still with the mix. And that's why we don't really forecast this because the mix is a wildcard, right? That's the result of a lot of moving pieces there. So -- but the most important pieces of it, rate and time, we still feel good about. We may not have a huge time improvement, but we're running at really high levels of time utilization. So we'll stay tuned there, but we certainly continue to focus on rate and mix will be what it will be. And we think at the end of the day and embedded in this guidance is that will be positive fleet productivity to make sure we can offset that inflation. Unknown Analyst: Got it. Okay. And then just in terms of the -- your plan on fleet loadings and just CapEx in '26 from a timing standpoint, just given that you pulled forward a little bit more CapEx into 4Q, does that impact the timing in terms of how you expect to land that fleet in '26? Or is it more of a normal cadence... Matthew Flannery: Yes. I'd say more of the normal cadence, Tim. I'd say the -- in that 15% to 20% range in Q1. In the middle quarters, it will vary depending on how fast we're getting deliveries and how good the team is doing driving utilization, but we'll be in that 70%, 75% range and then the balance in Q4. So pretty similar to what we've been doing. Operator: We'll go next now to Ken Newman of KeyBanc Capital Markets. Kenneth Newman: Maybe to start off, Ted, I think you mentioned in your prepared remarks having to hold on to some high-time used equipment, which impacted used sales volumes this quarter. Can you give a little more color on that? And just what exactly were those categories kind of reflecting? William Grace: Yes, absolutely. So as you saw in our guidance, we initially expect or what we've consistently said is we expected to sell about $2.8 billion of OEC across the year, and we came in at about $2.73 billion. So you can see that shortfall really was in the fourth quarter specifically. And we had a number of regions that just ran busier with certain high-time assets. So you would think things that might reach high in the air. So it could be aerial products, telehandlers, things of that sort would probably be the most notable categories. And so obviously, those things were on rent. We weren't going to pull them from customers to sell them. And so that really kind of explains the deviation in terms of the used mess. Kenneth Newman: Got it. Okay. And then maybe just for my follow-up, I just wanted to circle back to the margin guide. It sounds like you expect some of these cost actions that you're implementing to help offset the ancillary and delivery mix as we go through the year. Just any help on how to think about the margin progression? Is that something that you expect to take place more materially in the back half? Or just -- is this going to be something that you expect day 1 here in the first quarter? Matthew Flannery: Yes. To your point, it's something that will progress. This isn't going to be a light switch. And specifically, when you think about some of the mitigation and repositioning costs, just by definition, more of that will happen when we have more activity. So in our peak quarters of volume is when the opportunity is. But then even some of the other costs that we're taking out, it will build up along with when the costs are usually achieved, so to speak, or actually not achieved. So we'll still have some noise here in Q1. And then as we work through the year, we believe we'll start to see the benefits of some of these actions. Operator: We'll go next now to Steven Ramsey of Thompson Research. Steven Ramsey: I wanted to touch on the growth CapEx number of $1.1 billion, I believe you said for the year. Maybe to remind us how that compared to 2025 and if the nature of the growth CapEx this year is similar to '25. William Grace: Yes. So if you look at what we did in 2025, total CapEx was, call it, with rounding $4.2 billion. Within that, there was probably something like $3.4 billion of what we would call maintenance. So that would imply something on the order of $800 million, $900 million of growth CapEx in the year. So I think in my comments, I mentioned there was an additional $300 million of growth CapEx. That will really focus on 2 areas. One is continuing to drive the growth in specialty and then taking care of large projects where we're going to need more fleet. Matt, anything you'd add there? Matthew Flannery: No, I think that covers it. Steven Ramsey: Okay. That's helpful. And then one other thing. I wanted to get some insights on the ancillary piece and if you are intentionally trying to drive this revenue on the ground and incentivizing it with the sales force? Or how much of that is a function of specialty having higher ancillary revenue that carries with it? Matthew Flannery: Yes. No, this is much more of a response to what the customers' needs are. And for some of it, it's actually setup. So think about if we're doing setup for a job trailer or some kind of setup for a power or HVAC setup. So a lot of this stuff comes with products that we're supplying, and it's just the need that the customer has where they like us to do it for them versus doing it themselves. So it's not really -- it's certainly not something that's driven by the sales team. This is driven by the needs of the customer along with the products that we're serving them with. Operator: We'll go next now to Neil Tyler with Rothschild & Co Redburn. Neil Tyler: I wanted to come back to the margin drag from the transportation costs and just sort of think about that bigger picture. Ted, I think you said it was 70 basis points in the fourth quarter, and it's really started to feature more significantly in the second half. So there's 2 parts to the question. Firstly, is there any aspect of these additional costs that reflects the change in the fleet being more specialized and so perhaps less fungible. I think you're probably going to cover that one-off quite quickly. But the second part of the question is, in the context of what you assume for flattish local small project growth, if that proves a little conservative in the back half of the year, particularly, would we -- should we expect the margin drag from transportation costs to disappear as a sort of natural effect of a pickup and a more broad-based acceleration in demand growth? Matthew Flannery: Sure, Neil. So I'll take the first part first. From a fungibility of fleet, this is not a fleet composition dynamic. There may be some exceptions to that, right, some specific assets that you might need to move for an LNG plant that's unique. But for the most part, 95-plus percent of our fleet is extremely fungible. And that's a big tenet of our business model and how we believe in. We don't really get into unique one-off kind of serving one end market products because the lack of fungibility and then therefore, productivity you can drive out of it. And your point about the local market is a great one. But I wouldn't call it conservative. The way we see today, we do not expect there to be big growth in the local market. If that changes, we'll react as always. But when it does, that will allow us to use the density of our network, right, our entire cost structure to help drive growth, and it will be more efficient as opposed to having to reposition fleet and some of the stuff that comes with mobilizing to these large projects. So your thesis, we agree with 100%. We don't expect that local market repair. It's not embedded in our guidance for 2026. Operator: We'll go next now to Scott Schneeberger with Oppenheimer. Scott Schneeberger: Just a quick follow-up first on fleet productivity. You mentioned the matting was a whole point that impacted the fourth quarter on a delay. Is that something that's going to appear as like an outstanding or unique fleet productivity impacting first quarter? Or is it a push out a little bit farther? Just anything we should look at that would be abnormal in that first quarter? Matthew Flannery: Yes. So I do think it's abnormal. Could we get some of that in Q1? Yes, we could. It depends on when these projects actually mobilize, right? It has -- some of these large projects do have a big impact. But -- so one -- as I said earlier, we don't forecast the quarters because that mix component is so volatile. I think more importantly, for the full year, which is what we buy the fleet for and what we measure fleet productivity on, we do expect to have positive fleet productivity. And I expect it to be positive in Q1, just may not be meet our expectations and time will tell. We could get surprised, things can mobilize quickly. So we're not as focused on the quarters there as much as we are making sure full year, the fleet that we're spending on the CapEx on is bringing us the returns, and we're utilizing it in an efficient, profitable way. Scott Schneeberger: And then just on -- you guys speak often to technology investments often in the same breath as cold-starts. Just curious, obviously, it's embedded in this guidance you provided for 2026. But what are some of the technology investment focuses that you've had in recent years? How is that going to look different in 2026? And is that budget going up or down within this implied guidance? William Grace: Yes. Definitely, technology spend will be up in '26 versus '25. I think like a lot of companies, we're investing in a lot of different opportunities and initiatives. Some I would describe as more elective and some are critical. So we continue to try to leverage more and more technology to drive greater operating efficiency. So we've got a number of projects that would be designed to help with fleet efficiency, frankly, with repositioning costs and delivery costs. There's other things that are mandatory like cyber and protection. So there's a lot of stuff that we're investing on, all of which we're excited about the ROI on it where it's critical like anything defensive like cyber. Matt, anything you'd add there? Matthew Flannery: No, no, I agree. Operator: Thank you. And gentlemen, it appears we have no further questions today. Mr. Flannery, I'd like to turn the conference back to you, sir, for any closing comments. Matthew Flannery: Great. Thanks, operator, and thanks to everyone on the call. We appreciate your time. Glad you could join us today. Our Q4 investor deck has the latest updates. And as always, Elizabeth is available to answer any of your questions. So until we talk again in April, please stay safe. Operator, you can now end the call. Operator: Thank you, Mr. Flannery, and thank you, Mr. Grace. Again, ladies and gentlemen, this brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Henrik Høye: All right. Welcome to presentation of Protector's full year '25 results. We will focus on the full year. The quarter is volatile. We say that all the time, focus on the full year result that is more interesting and says more about the underlying realities of the business. And before I go into the results, I always spend a little bit of time on who we are. And what we did this morning was to continue on looking at what the challenger should be in the future. And one thing that we care about is that we -- even when we are 700 people, even when we grow in a number of countries that we still act as one team, which is a bit contradictory to a performance culture where we compete against each other and also that we want local decisions and also that we want each individual in the company to make decisions because they are where it happens and they should know what decisions to make. So that's what the challenger is. It is about making everything we do, focused and simplistic. But when it comes to culture, we need to complicate it in order to spend time and really understand. So that we're on the same platform and the same grounds for the future because I think that's extremely important in order to stay who we are, the challenger. And then to the highlights, other than that 84.7% combined ratio and a 14% growth with an investment result of a return of NOK 1.5 billion, leading to NOK 31.7 per share in earnings. We have had some other activities in the quarter, one being the placement of the Tier 1 debt where -- bond where the market was good, so with good terms on that. Maybe the biggest other than the growth for 1st of January, which I come back to. News is that we have now been relieved of the maybe biggest mistake that we've made in Protector workers' compensation in Denmark, where we took on board a portfolio knowing that we didn't have the exact data we needed to underwrite it, but we underestimated the downside of that portfolio. And we have now sold that. So the agreement with DARAG is completed, and we can now focus on the lines of business and the business that we know how to do in Denmark. So that's very good. I'll get back to the reinsurance side and the growth later on. And speaking about the growth, I think that it is important, in particular, following the 1st of January with high growth. It's important to remember how the portfolio is put together. And what we see here is a development. The development is driven by disciplined underwriting. So we underwrite in all these segments. And remember that the commercial segments, so if you look at the segment distribution on the left of the cake diagrams here. Commercial sector in all countries is bigger than the public and housing sectors. And -- but we have grown more in the public sector. That is due to mostly market conditions being -- it's been more rational pricing in the public and housing sectors than what it has been in the commercial sector. So that's why public sector and housing has grown a lot also in the past 5-year period. And property and motor, by far, our biggest product, short-tail products. And U.K. is now close to half the business or at least 42% of the business. But it's also important to remember that the 1st of January growth is related to the Scandinavian markets or the Nordic markets and France, not U.K. And the market conditions are different in those two geographies. So it's been easier to grow in the Nordics and France than what it has been in the U.K. in the past year. So it's just a support so that you see what the inception structure in our portfolio was in the years from '21 to '25. Obviously, we don't know exactly how that will look in '26, but at least you then see that distribution. And when it comes to '25, what you have seen throughout the year is that from the U.K., we've had a good 1st of April in public sector and housing, but we -- I've also said and we've also experienced that the market has been softening. So rates have been going down, especially on the product -- the property product in commercial sector. So it is slightly harder to achieve price increases. It's slightly harder to renew clients and also to get new sales. But the churn in the U.K. during 2025 has been good. So we've managed to keep the churn at a good level around slightly above 10% and been disciplined in the new sales side. And then we've had strong growth in the other territories or in Scandinavia. And that is supported by good renewals, renewal rate of 95% in total for the company, it's basically the same in the Nordics. And -- but we've also had some new sales. So the markets there are -- it's good on the Norwegian business, which has the highest growth out of the Scandinavian countries on 1st of January '26. So a similar situation to what you see here. Denmark is #2 1st of January '26, but Sweden has a lower growth in '26. So Sweden is a market where there is still more competition and more competition that we view as irrational. And then you have the French business, of course, where not a lot happens in quarter 4. So most of it is old news of the start there. However, 1st of January is an interesting date because we communicated an estimated number of what we thought we would quote for 1st of January following quarter 3. And -- that number was roughly right. So what we have seen in the market for 1st of Jan in France is that we have won approximately 10% of what we have quoted in the commercial sector space, motor. And that's a lower figure than what we are used to in Scandinavia. It's more in line with what we are used to on the motor side in the U.K. And then on the housing sector, where most of the property volume from '25 comes from, we have basically won nothing 1st of January '26. So one of the big competitors, AXA has come in and lowered prices a lot compared to what they did in '25. So it's not a hat trick in France. We have not won volume in all the segments we're in, but we've got some traction on the municipality side, the public sector side, where the market situation is very different from the housing sector. And the interesting thing is that the housing sector is quite similar to what we know in the U.K., where there is low deductibles, lots of escape of water claims and calculating the price is not very difficult. So when we may make a mistake and the competitors that price lower than us, they may know something we don't. Absolutely, it's new. We're new in France. But at the same time, it's difficult to see that it's very sustainable those levels that we see in the housing sector now. So at some point, we believe that we can have success there as well. Maybe not in the same way as '23 in the U.K., but at least it's not on the public sector side, which is more about large loss and risk selection. Unknown Analyst: There are a lot of questions along the presentation. Henrik Høye: Sorry, I forgot to say that. So please ask questions during the presentation. Unknown Analyst: [indiscernible] France, after quarter 3, you said that -- at that time -- have been seeing around EUR 300 million in potential volume. And that your effective quotation rate would be around 70 to 75 [indiscernible] So approximately where [indiscernible] Henrik Høye: So it continued to grow, not a lot from that, but the quotation rate went slightly down, both because of capacity -- our own capacity. So we prepared as well as we could, but we didn't have enough manpower to do that with quality. So the actual number is very similar to what you could derive out of the 370 to 375... Any more questions on volume side? And please ask questions in writing as well. Okay. Again, when we look at the full year, we also bring out the longer picture here, and there is volatility in not only the runoff and the large losses, but also on the loss ratio below those large losses and without the runoff. The large loss situation in 2025 is lower than what we had said is normalized. And the comment on the top here going from 7% to 8%, I'll get back to when I speak about the reinsurance, but that goes for '26, not for '25. So for '25, it's still a normalized level at 7% approximately. So we're slightly lower than a normalized level in '25 and had some run-off gains, even though it's best estimate, but I've also said previously that following a period with uncertain inflation, you should expect that we -- that there is a bit more uncertainty and then there could be some runoff gains from that situation if we have been on the conservative side. And then when it comes to claims, I think the important message here is to say that if we compare full year '25 to full year '24, and you normalize for runoff and large losses, all countries are slightly better on the loss ratio side. So it's an improvement coming from the price increases where we have unprofitable products or clients. And that's the simple way of seeing it. The only country that is slightly up, but very much the same is Sweden. And then there are some technicalities, one of which is on the -- or related to the transfer of the Danish Workers' Comp portfolio. So the risk margin is reduced. It's a one-off of approximately NOK 80 million for the quarter and the year due to lower risk in the remaining portfolio, have changed that model. And then there is a small -- between the countries, it has nothing to -- or no consequence on the total loss ratio. But between the countries, there is -- we've changed from a standard, very old model of calculating the future claims handling costs and that changes the distribution with slightly lower cost, which is claims handling cost is on a loss ratio for U.K. So U.K. is slightly higher and then Norway and Sweden have had a bit more of that cost, and that's a one-off again. So they're slightly lower. And with that information, it's -- the conclusion is that all countries compared to '24 are slightly better, normalized for all of that. Any questions on the loss development side? You have all the figures on large loss in order to normalize on all these levels. So I won't go through each of them, but that's the total picture. So we have cost and quality leadership leading to profitable growth as our targets. The cost side is very flat. There is no or very limited efficiency improvements in what you see here. There are some effects that make this look -- '25 look higher than '24. But if you correct for the fact that the share price has increased, we've talked about that before, more than what it did in '24, and that is connected to incentive-based share program for some employees and France, then you'll get slightly lower than what we had in '24 on the cost side. But there is no or very limited efficiency improvement. And we do that consciously. But of course, we do want to see the effects of that investment we make. I think it's more likely that we see that effect in new opportunities for growth that we spend it on developing the company in -- on the growth side to grow then that we cut and slim down departments very quickly in order to get the low cost. And that takes some time, as you understand. So I think that there is no -- nothing very special to comment on here other than those comments I've already had, unless you have any questions on specific countries or the totality on cost. Now continue to the quality leadership. And last time we brought this up, we had the U.K. survey with the brokers where we got very strong feedback. We've also had the Scandinavian or the Nordic surveys out and had very strong feedback. And it's especially good to see that we are increasing the distance to our competitors in all the Scandinavian countries. And we are also winning more prices, external prices from the brokers. So the largest broker in Scandinavia. We are #1 in Sweden and in Norway. And we've also won other external surveys that support our own survey. But at the same time, and as always, the most important thing about this survey is to understand that feedback, use it as a basis to discuss with the brokers who are our best and only friends, how we can improve, what we should prioritize to improve in the future. So this is good news. It doesn't automatically mean that we will get more business from the brokers, but it means that we can -- we're in a position to require more from our best and only friends. And I think that's the important part that the long-term gain from this is that we can require better data, more data, we can require that they invest together with us in competing against the direct channels and that we can do those larger projects because we -- you say that we are the best partner for you. So that's a good thing, but it doesn't mean that we win more clients tomorrow. Yes, there is basically nothing I haven't touched upon here since we've talked about the cost previously as well. So I'll move forward to the investment side. And -- yes, when you see this, it's per 31st of December and does not then include the reduction from the transfer of the workers' comp agreement, which is for '26, and it does not include new growth, of course. So that's a change. But the results on the investment side are strong in absolute terms and relative, especially on the equity side, but also on the bond side in a very strong market. And the yield is down due to the reference rate, if you compare it to last year. Other than that, on the bond side, it's very similar portfolio. We steer interest rate towards our liabilities, and we have a slightly shorter duration in our reserves. So that's down. And then you see the comment at the end that we have the assets under management are reduced by the transaction amount of the reserves that we had on the Danish workers' comp portfolio, approximately NOK 1 billion. And on the equity side, I think it's right to say that it's both absolute and relatively strong result. There is some changes in the portfolio. You see that the discount to intrinsic value has reduced significantly from last year. Some of it is obviously that we've had the gain that we had. So the share prices have gone up, but there are also some companies or some sectors that have performed worse than what we have expected. So there have been some changes in the intrinsic value. So we're open as a value. So -- and this year, it has been some disappointments on certain segments and companies and some changes in that portfolio. But even though it's the same number of holdings, there have been some changes in the portfolio during 2025. And you'll see that in the annual report what we had at year-end '25. Any questions to the investment side? Microphone? Unknown Analyst: You managed to earn an annual rate of return on investments of like 14% over the last 10 years, which you saw on the last slide. How did you do that? And are you going to keep on doing it? Or is it going to be another number in the next 10 years? Henrik Høye: So Dag Marius is here and he's in charge of that, but I can answer that question in at least a simple way, and that is that we believe in what we're doing, and we will continue believing in doing that. So investment is core business for Protector as insurance is. And we will continue to step-by-step have improvements in our processes. And -- but what the future will give, that's very difficult to say. Our ambition is to beat the market over time. And we think that those processes are set to do so. So unless Dag Marius has anything to add. On the income statement here, we have a couple of comments. And I've touched upon one of them before, the change in risk adjustment, it's an IFRS element. So it's on top of the best estimate reserves. There is a risk adjustment in IFRS. And when a long-tailed reserve portfolio is out of our portfolio, then the risk in total for the rest of the portfolio is lower. So that's why we've made that change. It's a one-off, and it should be a stable number or fairly stable number in the future, depending on where the growth comes from. And then it's the larger change that we've made on reinsurance. And it's a bit complicated just because there are no figures that will exactly clarify what has happened on the reinsurance side in the accounts. But to make it simple, we see it from two sides. So I said that we increased the large loss -- normalized large loss rates by 1 percentage point from 7% to approximately 8%. So we're taking a bit more risk ourselves, buying less reinsurance on certain programs. I'll get back to that. And then on the other side, we pay less for that reinsurance. And we wouldn't have done that if we didn't think it was a good idea. And we've done that on the areas where we have a lot of data, so where we think that we're actually able to predict what those large losses will be over time. So that's -- so one angle is that we have increased risk, and that's -- that will mean that -- so it's the very large losses. And as you've seen over the last 5 years, our large loss rate is lower than 7%. And so these are the very large losses. So it's not something that will happen every year. It's -- this is a volatile element. It's a volatile part. It's long -- far out on the tail that 1 percentage point that we're speaking about. And then the reduction in cost is then higher than what that increase is. On the capital development side, on the own funds, we have the Tier 1 that we issued. And then as we're growing, we utilize more of the Tier 2 capital that we have issued previously. And then that's basically the same amount as the dividends that will be paid. So that's stable. And then on the requirement side, it's on the insurance side that there is a change and it's related to reinsurance. And that's the other angle to that reinsurance exercise that we -- so it's increased approximately NOK 300 million on the requirement side. And when we do that, and we have a target or a requirement of 20% return on that capital we need to hold for NOK 300 million insurance risk, which is higher than NOK 300 million, of course. Then our view is that has to be that it's much higher or higher than 20% return on that equity. And our estimation is that it is much higher than that. If not, we wouldn't have done it. So what we have done is to say that on what we call risk -- the risk program, that's basically fires that can be that large on the risk program. We have increased from 100 million Scandinavian kroners or 10 million pounds or euros to NOK 330 (sic) [ 300 ] million. And that's because we have very solid data sets to document and to calculate losses between or up to NOK 300 million and the price is too high. So let's not buy it. We can take that volatility. But obviously, there will be slightly more volatility in our results. But the economic realities of it is that it's the right thing to do. The cat is different. So natural catastrophes, that's different. Just like predicting the interest rate, I don't think we should believe that we are best in the world at predicting what the weather will look like and what climate changes will do. So to increase too much on that side, obviously, we have a view of both how we select risks when it comes to natural catastrophes. We have processes and data that aim to avoid the worst ones where there will be the most flood or the most windstorm damage. But to predict the consequence of weather-related damage to our portfolio is difficult. So we have increased retention on the traditional program to the same level or actually higher since it is in Danish kroner as on the risk side, but that's only for the first loss, then we bought more reinsurance that reduces that to DKK 100 million on the second loss. And the reason is basically that we don't think we know exactly how to calculate that. On the U.K. liability, it's just a too high price. So we -- then we say that you pay this price or we take it ourselves to the reinsurers and some wanted to pay that price or take that price and some didn't. So then we took a higher share of the layer between GBP 10 million and GBP 25 million on U.K. liability. And we are much more comfortable with that portfolio today than what we were when we entered the U.K. So that's -- yes. Any questions on the reinsurance side? Unknown Analyst: Henrik, one, I think that what you're doing sounds reasonable, absolutely, so we like it. What's your estimated or guesstimated increase in retention rate after this one? Because when we do our calculation, we end up that you estimate a large loss ratio to go up from 7% to 8%. And our estimation is that the retention rate will increase with around 2.0 percentage points. Is that a fair assumption, would you say? Henrik Høye: Yes, I think that's a fair assumption. And obviously, it depends on how the portfolio develops. But with the '25 portfolio, it's a fair assumption. Distribution policy, it is very similar to what we have had previously. What you do see is for the one who has studied it next to each other is that it is -- the arrow is slightly taller. The green starts slightly higher up and the box -- the blue box above 200 is slightly higher than the one below. And that is to reflect the process that we have where it's not really about these numbers, 200% or 150% is important. That's the bottom and then there are activities. But it's about the risks that we look at and evaluate every quarter on the different areas, mainly the insurance side and the investment side, but all the underlying risks from them and then the stress scenarios and what we have in a stress situation because what we always want to be sure of is that we are ready to act on profitable growth and good investment opportunities in a crisis situation, but at the same time, not to get lazy, obviously, and make sure that we don't think that we can make a lot more than you if we don't see those opportunities right in front of us. But that's -- it's a quarterly process or a continuous process with a quarterly decision, and it is -- it happens after we know what the results are, not before. Our long-term financial targets, no change in them. And it may seem a bit conservative to say 91% combined ratio with the history of the past 5 years. And the underlying realities is, when I say that they look good and we deliver 85%, they still look good. So -- but it is something about the growth -- Protector as the growth company. We -- profitability is extremely important, but we also have to face the fact that in order to find new markets, there is a bit more uncertainty and we need -- price is the deciding factor. So 91% is long term, a very good return on equity and the same there, conservative relative to those numbers, but I think that it is a good steering to have. And then we're back to the summary and any questions on the totality or the last part? Unknown Analyst: My name is [indiscernible]. I have a question, if I remember correctly, at the last quarterly presentation, you talked about the possibility of entering a new market in the U.K. within real estate. Could you say something about -- are you quoting for the 1st of April already? Or is it too soon? And could you say something about your volume expectations in this market? Henrik Høye: Yes. Good question. I should probably have said something about it on the volume side. So it's -- we have quoted very selectively so far in the real estate market. We have won a handful of clients in that market. But the selectiveness is due to the fact that we basically only quote what looks like what we have from before, housing, for instance, in the real estate sector. And in that part of the real estate segment and especially for the large clients, it seems like the rates are a bit too low. So we haven't won many of the larger clients there yet. But we have quoted very little so far, so that it's a bit unsure if the market intelligence is significant. But we're building those databases with data from the brokers. We're actually getting large databases from the brokers. And when we have a more granular model that can separate the different types of risks within real estate, we are very ready to make that a quoting machine. So we have -- there, we have the model, the people and the setup. So we're feeding that with data. And then we've said that it's approximately GBP 1 billion in that market for what we have risk appetite for. And over time, and I don't know what that is. I'd say it could be 3 years. If things -- if it's a hard market and a rational market, it could be 7 years if it's a bit up and down. But we should have a large share of that market, meaning at least double-digit percent or higher than that is quite obvious because there is a lot of attritional losses and cost will matter in that segment. It's very similar to what we do. So nothing in the figures for now. No good understanding of the market situation, but we're preparing, still preparing. 1st of April is not necessarily a very large date. It's more spread out on the real estate sector. Thomas Svendsen: Thomas Svendsen from SEB. So a question to your U.K. business, just to help us to try to calculate sort of the trajectory of the combined ratio there. So the business you have today, that's the back book and then you have the front book. So how many years do you think it will take before you have replaced the favorable business with the new maybe softer business? Henrik Høye: So it's -- I've commented on this before, and we haven't changed the view on it other than that -- the parts of the portfolio that should be out in 1st of April '26 is going to be smaller than what we estimated. So it's not coming out for tender. But basically, what you can say is that for all the business we wrote in '23, which is the big inflow as 1st of April '23. It will be some clients with -- then 3 years, but I'm saying that that's a smaller share than what is the normal. And then some clients with a 4-year before they go to market. And then -- so let's say that it's approximately, I think I said that before, 40% on 4 years and 40% on 5 years and then 20% on 3 years. And then maybe it's 42% and [ 42% -- 16% ]. Thomas Svendsen: Okay. Good. And just on your -- if you look away from France, but just on your combined ratio. So are you thinking -- are you prepared to go materially above or somewhat above 91% in certain of your established markets if some are below and you think about the average on your existing business looking away from France? Henrik Høye: I think on existing business, we are prepared to write contracts over time that can be slightly above 91% on short-tailed business, if it makes sense. And that can mean first year not to do a price system, but that it is necessary to come in on a higher combined ratio than -- or significantly higher than 91% on the first year with mechanisms and risk management initiatives that make it profitable over time. And we -- but maybe more interesting, I think, is that we then -- we're more interested in looking at new segments or going into business that we find data for, but that are new to us, which there is a bit more uncertainty around, but we have a strong book in the bottom. Unknown Analyst: [indiscernible] A question regarding volume in Sweden going forward. You mentioned that it's still somewhat irrational pricing there and as such, a bit harder to gain volume. Should we expect the coming years '26, '27 to be at approximately '25 levels? Or do you expect that to decrease or increase based on the market situation? Henrik Høye: I think that it's very hard to predict what the competitors will do over the next 2, 3 years. But I -- what we see now is that it is still more difficult in Sweden, and that probably doesn't change tomorrow. But there are a couple of market movements in Sweden that can give us more opportunities. So one of the largest players in Sweden is not -- they haven't officially run out with it, but they are not very interested in brokers, and that can give some better opportunities, more opportunities. There are also some large initiatives on facilities in the Swedish market that goes for the whole Scandinavian market, where we have a very strong position with the brokers to do that cooperation. And then we're in a game where it's more about finding an efficient way of dealing with clients that are slightly smaller and give them a good product through a broker, and that can grow the broker market share -- brokers' market share. And that's -- since the largest Scandinavian broker is headquartered in Sweden, they are furthest ahead there. So there are some market opportunities that can be bigger, but the competitive landscape is a bit volatile in Sweden. Unknown Analyst: You've probably been asked this question many times before, but why did you really choose France? Henrik Høye: Yes. So the short version of that is that we looked at many countries on a high level. Is it -- do the brokers have a good market share? And is the market large enough that we -- that it is interesting to us? Is data available in that market. And public sector has been important for us. That is a market that is -- has the same dynamics as we used to with public procurement regulations and a similar type of insurance purchase. And then we -- through the high-level analysis we started in Spain, we didn't get data in Spain. When we went to France, which was #2. And then we met the brokers, got data in France, and then we can go to the table and at least have a similar starting point as competitors when it comes to competence and understanding of the history. No more questions. Thanks for meeting or listening in. I wish you a good day.
Operator: Greetings, and welcome to the Fourth Quarter 2025 Meritage Homes Analyst Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the call over to Emily Tadano, VP of Investor Relations and External Communications. Please go ahead. Emily Tadano: Thank you, operator. Good morning, and welcome to our analyst call to discuss our fourth quarter 2025 results. We issued the press release yesterday after the market closed. You can find it along with the slides we'll refer to during this call on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our homepage. Please refer to Slide 2, cautioning you that our statements during this call as well as in the earnings release and accompanying slides contain forward-looking statements. Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. Any forward-looking statements are inherently uncertain. Our actual results may be materially different than our expectations due to a wide variety of risk factors, which we have identified and listed on this slide as well as in our earnings release and most recent filings with the Securities and Exchange Commission, specifically our 2024 annual report on Form 10-K and Form 10-Q for subsequent quarters. We have also provided a reconciliation of certain non-GAAP financial measures referred to in our earnings release as compared to their closest related GAAP measures. Share and per share amounts have been retroactively restated to reflect our January 2, 2025, stock split for all prior periods. With us today to discuss our results are Steve Hilton, Executive Chairman; Phillippe Lord, CEO; and Hilla Sferruzza, Executive Vice President and CFO of Meritage Homes. We expect today's call to last about an hour. A replay will be available on our website later today. I'll now turn it over to Mr. Hilton. Steve? Steven Hilton: Thank you, Emily. Welcome to everyone listening in on our call. Today, I'll begin with a brief overview of market trends and highlight our fourth quarter results. Phillippe will then discuss our strategy and provide an operational update. Finally, Hilla will review our financial performance and share our 2026 forward-looking guidance. The fourth quarter of 2025 ended the year marked by much softer-than-anticipated market conditions as affordability challenges persisted and buyer confidence deteriorated. Our fourth quarter 2025 sales orders totaled 3,224 and our average absorption pace was 3.2 net sales per month, reflecting Q4 sales seasonality, a pullback in buyer urgency and a strategic decision to hold the line on incentives. Despite the tougher conditions, our 60-day closing guarantee and healthy supply of nearly completed spec inventory contributed to another quarter with an exceptional backlog conversion rate of 221%. We delivered 3,755 homes and home closing revenue of $1.4 billion this quarter, which led to an adjusted home closing gross margin of 19.3% and adjusted diluted EPS of $1.67, both in line with our guidance range. We also increased our book value per share 7% year-over-year and completed $150 million of stock of share buybacks, returning nearly $180 million in total capital to shareholders this quarter via repurchases and dividends. Our full year 2025 sales volume of 14,650 homes was essentially flat compared to prior year as we grew ending community count 15% year-over-year to 336 communities, offsetting slower demand. On a full year basis, we achieved an average absorption pace of 3.9, which we believe was better than the broader market trends, demonstrating the benefit of our strategic focus, including our strong realtor engagement. We anticipate that in the near term, market conditions will continue to be impacted by elevated mortgage interest rates, job security concerns and greater macroeconomic geopolitical uncertainties. However, long-term housing demand remains supported by favorable demographics and undersupply of affordable homes in the United States. We believe our strategy allows us to effectively compete with existing home sales, which will continue to create a market differentiator for us. With that, I'll turn it over to Phillippe. Phillippe Lord: Thank you, Steve. First, I want to thank our Meritage team for their hard work and dedication this year. Through challenging conditions, they never wavered from our vision to positively impact the lives of our customers as evidenced by our industry-leading customer satisfaction scores for 2025, while still focused on generating value for our shareholders. I would like to emphasize our balanced approach to capital allocation. We strategically terminate certain land deals to redeploy our capital towards repurchasing additional shares and acquiring new land that will enhance our long-term portfolio. These decisions were influenced by several factors: our market outlook, the land market, growth targets, our current stock valuation and the evolving macroeconomic landscape. The resulting changes stem from a thorough review of our controlled asset pool, allowing us to make informed decisions about which deals to exit to better position ourselves for the future. While we always encounter a few deals that don't meet our criteria after due diligence, we do not anticipate this level of deal terminations to reoccur, assuming the current economic environment remains stable. The recent slowing demand environment has presented opportunities to enhance our land portfolio in specific submarkets. We observed land deals returning to the market, sometimes in more strategic locations and with more favorable structures. Although land prices have not significantly declined, we believe these alternatives will positively impact our long-term profitability in the coming years. Consequently, we have unwound some existing land contracts to reallocate capital towards additional share repurchases and new and future land deals. Based on our current view of our overhead this quarter, building on a multiyear technology initiative focused on automation and process efficiencies, we are now able to achieve improved back office productivity aligned with our move-in ready all-spec strategy. Our goal is to remain highly efficient and drive increased operating leverage of near-term macroeconomic conditions. Finally, as announced in Q4, we are committed to redeploying $400 million towards share buybacks in 2026, highlighting our view that the stock remains significantly undervalued. We repurchased approximately 2.2 million shares this quarter at an average discount of 12% to 2025 year-end book value per share. For full year 2025, we repurchased 6% of our outstanding shares. Our decisions have been thoughtful and intentional considering the current environment, and we believe the actions we are taking today position Meritage to continue to generate continued long-term value creation. Now turning to Slide 4. Fourth quarter 2025 orders were 2% lower year-over-year, primarily due to an 18% decline in average absorption pace, which was mostly offset by an 18% increase in average community count. The cancellation rate ticked up to 14% this quarter, but remained slightly below the historical average of mid- to high teens as we benefit from a quick sale to close process. Our fourth quarter 2025 ending community count of 336 was an all-time high, up 15% year-over-year compared to 292 at December 31, 2024, and up 1% sequentially compared to 334 at September 30, 2025. During the quarter, we brought 35 new communities online throughout all of our regions. For full year 2025, we opened over 160 communities. In addition, we are expecting another 5% to 10% community count growth in 2026. Given our robust growth in 2025 and further expansion in 2026, we believe Meritage is well positioned to gain market share, both near term and as macro conditions improve. Our fourth quarter 2025 average absorption pace was 3.2 compared to 3.9 in the prior year as we intentionally elected to not further lean into incentives where we experienced market inelasticity from weakened demand in order to balance margin and velocity. We remain committed to maximizing the value of every asset in our land book. Long term, we continue to target 4 net sales per month on average, the pace at which we are able to operate most efficiently and leverage our fixed cost. However, we are willing to temporarily moderate slightly from this target to optimize our business in the current demand environment. ASP on orders this quarter of $374,000 was down 6% from prior year due to an increased use of incentives and discounts as well as geographic mix. We don't yet know how the spring selling season will unfold, but we are encouraged by improved selling conditions in January when compared to the more difficult demand dynamics we experienced in December. We are also hopeful that lower mortgage rates will unwind some of the lock-in effect for existing homeowners who are looking to move up. Now moving to the regional level trends. In Q4, demand patterns were highly localized by market with a generally tougher selling environment nationwide. Across all regions, incentive utilization increased to get buyers off the fence. In our most favorable markets, Dallas, Houston, North and South Carolina, we maintained a strong absorption pace supported by resilient local economic conditions. Conversely, our teams faced lower demand and aggressive local competition in Austin, San Antonio, parts of Florida, Northern California and Colorado. We deliberately chose to hold our ground in these markets and accept lower sales volumes as we look to the spring selling season to work through our excess home inventory. Now turning to Slide 6. In Q4, to align with our current sales pace, we moderated starts, which totaled approximately 2,700 homes. 24% less than last year's Q4 and 12% lower than Q3. As our spec targets are a function of expected demand, our reduced cycle times allow us to quickly flex and ramp up starts pace if demand picks up in the spring selling season or slow it down if conditions were to erode further. With 63% of Q4 closings also sold during the quarter, our backlog conversion rate was yet another all-time high for the company of 221%, reflecting the benefit of our 60-day closing rate guarantee. As a result, our ending backlog declined 24% year-over-year from approximately 1,500 as of December 31, 2024, to approximately 1,200 homes as of December 31, 2025. With our improved cycle times, we are able to maintain lower inventory levels without compromising our 60-day closing commitment as labor availability and supply chains are stable and predictable. We reiterate our long-term backlog conversion target of 175% to 200%. We believe the most meaningful view of our inventory is the combined total of our specs and backlog as more than 50% of our deliveries consistently come from intra-quarter sales for the last 5 quarters. We had approximately 7,000 specs and backlog units at December 31, 2025, compared to about 8,600 units at December 31, 2024. We ended the quarter with approximately 5,800 spec homes, down 17% from approximately 7,000 specs in the prior year and down 8% sequentially from Q3. The spec count reduction was deliberate and intentional as it is not a constraint on our closing potential for 2026, given our faster construction cycle times and ample available spec inventory. The 17 specs per store this quarter was our lowest level since mid-2023. This translated to 5-month supply in line with our target of 4 to 6 months supply of specs on the ground and intentionally skewed slightly higher as we prepare for the spring selling season. In the fourth quarter of 2024, we had 24 specs per store or 6 months of supply. Our completed specs comprised 50% of our total spec count at December 31, 2025. This level is slightly above our target of approximately 1/3 completed specs, and we intend to bring this ratio down during the spring selling season. With that, I will now turn it over to Hilla to walk through our financial results. Hilla Sferruzza: Thank you, Phillippe. Let's turn to Slide 7 and detail. Fourth quarter 2025 home closing revenue of $1.4 billion was 12% lower than prior year as a result of both 7% lower home closing volume and a 5% decrease in ASP on closings to $375,000 per home. Our affordability focus is evident as our ASP was notably below the $411,000 median ASP on 2025 closings in the U.S. Our closing and revenue were slightly below our guidance range as we intentionally slowed our pace by limiting the layering of multiple incentives and preserving margin in markets with inelastic demand. Despite an increased focus on price and margin, overall ASP on closings was impacted by the increased take rate of incentives as compared to prior year and geographic mix shift as the West region with our highest ASPs comprised a smaller portion of closings this quarter. We anticipate elevated incentive levels will continue near term, although the cost of financing incentives is starting to moderate. Home closing gross margin was 16.5% for the quarter, and adjusted gross margin was 19.3%, excluding $27.9 million in terminated land deal walkaway charges, $7.8 million of real estate inventory impairments and $3.2 million in severance costs in the fourth quarter of 2025. This compared to fourth quarter 2024 home closing gross margin of 23.2% and adjusted gross margin of 23.3%, excluding $2.8 million in comparable terminated land deal walkaway charges. As Phillippe mentioned, we elected to terminate certain option land positions to release capital and topgrade our land portfolio as better opportunities become available. We exited land deals across all regions with approximately 2/3 of the $27.9 million in walkaway charges coming from the East region. Our impairment assessments are conducted minimally on an annual basis or quarterly during declining market conditions as we're currently experiencing. We evaluate the recoverability of all of our real estate assets, both owned and controlled as part of this review. In addition to terminating over 3,400 lots resulting in the walkaway charges, we also recorded $7.8 million in impairments this quarter on owned inventory as we adjusted pricing to local market conditions. Adjusted home closing gross margin was 400 bps lower in Q4 as compared to prior year due to greater utilization of incentives and discounts, higher lot costs and loss leverage, all of which were partially offset by improved direct costs and shorter cycle times. Our land basis in 2025 included elevated land development costs from work completed over the past several years, which will continue to impact our margins in 2026. However, we are hopeful that starting in late 2027, our lot costs as a percentage of ASP should start to return to historical averages and we reflect renegotiated land development costs and the lower land basis we expect to be able to acquire over the next several quarters. During the quarter, we had direct cost savings of nearly 4% per square foot on a year-over-year basis. More recent starts have lower direct costs, although the benefits will not be visible until later in 2026 as we continue to work through our existing spec inventory that was built earlier in the year. Our cycle times held to a sub 110-day calendar schedule, in line with Q3, but an improvement compared to prior year. Our long-term gross margin target remains at 22.5% to 23.5%. We expect to reach the target once incentive levels return to historical averages and market conditions normalize. SG&A as a percentage of home closing revenue in the fourth quarter of 2025 was 10.6% compared to 10.8% in the fourth quarter of 2024, primarily due to lower performance-based compensation, which was partially offset by lost leverage as well as higher external commissions and technology costs. Q4 external commission costs were higher year-over-year to help secure volume in a tougher selling environment. Our co-broke percentage remained similar to the first 9 months of this year in the low 90s percentage capture rate, which we believe is at or near the top of our peer group. We also continue to see an increase in repeat business from realtors, underscoring the strength of our broker relationships. Fourth quarter 2025 SG&A included $2.4 million of severance costs with no similar charges in the prior year. We maintain our long-term SG&A target of 9.5%, which we expect to achieve at higher closing volumes. The fourth quarter's effective income tax rate was 18.5% this year compared to 22.1% for the fourth quarter of 2024. The 2025 tax rate reflected our purchase of below-market 45Z transferable clean fuel production tax credits that reduced income tax expense this quarter. This was partially offset by fewer homes qualifying for energy tax credits under the Inflation Reduction Act, giving the new higher construction threshold required to earn tax credits this year. We expect a minimal impact in 2026 from the complete elimination of the energy tax credit by June 30 as we were not eligible for such credits in most of our markets throughout 2025. Overall, lower home closing revenue and gross profit led to a 30% year-over-year decrease in fourth quarter 2025 adjusted diluted EPS to $1.67 from $2.39 in 2024. There were $42.9 million in nonrecurring charges this quarter and $2.8 million in the prior year. As for full year 2025 results compared to prior year, orders were flat, closings were down 4% and our home closing revenue decreased 9% to $5.8 billion. Excluding $60.2 million in nonrecurring charges compared to $6.7 million in 2024, our full year adjusted gross margin of 20.8% was 420 bps lower than 25.0% last year, primarily due to greater use of incentives, higher lot costs and loss leverage. SG&A as a percentage of home closing revenue was 10.7% in 2025 versus 10.1% in 2024 as a result of loss leverage as well as higher external commissions, spec maintenance costs and spend on technology. Excluding $66.4 million in nonrecurring charges compared to $6.7 million in 2024, adjusted diluted EPS for 2025 was $7.05 compared to $10.79 in 2024. Before we move on to the balance sheet, I wanted to quickly cover our customers' fourth quarter credit metrics. As expected, FICO scores, DTIs and LTVs remain relatively consistent with our historical averages. While the financial strength of our customers has not materially changed, buyer psychology is driving the demand for higher incentives and discounts. On to Slide 8. Our balance sheet remained healthy at December 31, 2025, with cash of $775 million, nothing drawn on our credit facility and net debt to cap of 16.9%. As a reminder, our net debt-to-cap ceiling remains in the mid-20% range. Based on market opportunities to topgrade our land book that we already covered, we walked away from certain land positions this quarter. Further, in response to slower demand, we experienced fewer community closeouts, allowing us to phase land development into smaller parcels and conserve cash. These combined efforts translated to $416 million in land spend this quarter, 40% less than last year. Given current market conditions, we are forecasting land acquisition and development spend of up to $2 billion in 2026. We returned $179 million of capital to shareholders via buybacks and dividends this quarter, up from $67 million in the same period last year. In Q4, we accelerated share repurchases to over 2.2 million shares, spending almost 4x more than prior year in the same quarter. For full year 2025, we bought back a company record of $295 million worth of shares, reducing our outstanding share count by 6%. We ended the year with $514 million still available under the repurchase program. We have now repurchased nearly $836 million or 22% of our outstanding common stock since implementing our share buyback program in mid-2018. And as we shared in our November press release, we plan to programmatically buy back $100 million of shares in each quarter in 2026, assuming no material additional market shifts. We increased our quarterly dividend 15% year-over-year to $0.43 per share in 2025 from $0.375 per share in 2024. Our cash dividend totaled $29 million in the fourth quarter of 2025 and $121 million for the full year. We have returned nearly $270 million to shareholders in the form of dividends since we initiated this program 3 years ago. We will be evaluating the 2026 quarterly cash dividend amount next month, and we'll share the update publicly when available. In 2025, we returned a total of $416 million of capital to shareholders or 92% of this year's total earnings. On a cumulative basis, since mid-2018, we have returned over $1.1 billion in total capital to shareholders through both buybacks and dividends. Turning to Slide 9. Our net lot activity was a decrease of about 500 lots this quarter as our approximate 3,400 lot terminations exceeded new lots put under control. In the fourth quarter of 2024, we put nearly 14,400 net new lots under control. As of December 31, 2025, we owned or controlled a total of about 77,600 lots, equating to 5.2 years supply of the last 12 months closings. We also had nearly 14,600 lots that were still undergoing diligence at the end of the quarter. We remain focused on utilizing more off-balance sheet financing vehicles and target a mix of about 60% owned and 40% option lots, although we look to balance margin and IRR from such initiatives. About 72% of our total lot inventory at December 31, 2025, was owned and 28% was optioned compared to prior year where we had a 62% owned inventory and a 38% option lot position. Since our 3,400 lot terminations this quarter were all off-book controlled lots, our ratios are temporarily disproportionately skewed to owned at year-end. Finally, I'll direct you to Slide 10. I want to emphasize that our guidance is based on current market conditions. We're guiding to full year 2026 closings in line with our 2025 performance in both units and home closing revenue, assuming no changes in market conditions. For Q1 2026, we are projecting total home closings between 3,000 and 3,300 units, home closing revenue of $1.13 billion to $1.24 billion, home closing gross margin of 18% to 19%, an effective tax rate of about 24% and diluted EPS in the range of $0.87 to $1.13. With that, I'll turn it back over to Phillippe. Phillippe Lord: Thank you, Hilla. In closing, please turn to Slide 11. As we look to 2026 and beyond, I want to remind everyone about who Meritage has chosen to be, a top 5 builder focused on spec building with move-in ready inventory, streamlined operations, a diverse geographic footprint and a differentiated ability to compete against retail given our 60-day closing ready guarantee and realtor engagement. All of these attributes give us a clear competitive advantage to operate efficiently under all market environments. When combined with our community count growth and improved cycle times, I believe Meritage is well positioned to continue to capture market share when demand dynamics improve. With that, I will now turn the call over to the operator for instructions on the Q&A. Operator? Operator: [Operator Instructions] We'll take our first question from Trevor Allinson with Wolfe Research. Trevor Allinson: First one is on your 2026 outlook. You mentioned historically, you saw that 4 absorption pace per month. Near term, you're willing to dip a bit below that level. I think the incentive environment has been challenging for a while now. So what drove the change in your approach here? And then what is the temporary new level of absorption we should expect you to operate in the current environment? Phillippe Lord: Thanks, Trevor. So let me just talk about what drove the temporary refocus on margin and not chasing incentives. As we rolled into Q4, we saw a lot of builders clearing the decks with aged inventory. And so we knew that incentives were going to be elevated in Q4 and intentionally chose at least for that quarter to not chase additional sales and operate at a slightly slower volume. As we look into Q1, I think there's still some noise in the system. There's still some builders out there, including ourselves, who are clearing inventory. So we'll see how it goes. But we do expect the spring selling season to be better, so we see opportunities for improved returns, both in the form of absorptions and margins in Q1 and Q2. So our goal is to try to do 4 a month throughout the year. But right now, we're hedging a little bit based on what the builder competition is doing and waiting to see exactly how the spring selling season will materialize. Hilla Sferruzza: Yes. We've not reset a different target. It's community by community, week by week. The goal is still an average of 4 net sales per store, which we achieved in 2025. We were just a share shy of it at 3.9%. Phillippe Lord: For the full year. Yes. Trevor Allinson: Okay. Okay. That's a really helpful clarification. And I think also a very smart approach in the current environment. The second question is related to specs. You've done a really good job of working down your specs per community. I think you mentioned they were down to 17 versus 24 a year ago. With that in mind, are you -- do you have those where you want them now? Do you expect a further reduction here moving forward? And then I think you may have mentioned it, but can you remind us what portion of those specs are finished? And where do you target finished specs per community in the coming quarters? Phillippe Lord: Yes. Thanks for the question. I think we're not quite where we want to be. We still have about 50% of our specs are nearing finished or finished. We'd like that to be more around 1/3. We like to have about 1/3 that can move in, in 30 days and about 1/3 that can move in 60 days and then the other 1/3, we're just starting. So we're getting close to that, but we have -- still have some areas where we're whittling down our finished inventory. As far as the 17 specs per community, that's pretty close to our target. It might go down a little bit if the market doesn't cooperate in certain places, but that's pretty reasonable. And we always like to carry a little bit more specs right now because we expect the spring selling season to be the strongest part of the year. And then we carry a little bit less specs in the back half of the year when seasonality were to occur. Operator: We'll take our next question from Alan Ratner with Zelman. Alan Ratner: First question, I just want to clarify, the community count guidance of 5% to 10%, your community count ramps pretty meaningfully throughout '25. So is that growth off of your year-end count? Or is that on an average for the year, which I think if it's the latter, I guess, would imply more like a flatlining from here. Can you just clarify that? Phillippe Lord: It's the growth off our current year-end. So it's not we'll have 5% to 10% incremental community count growth this year. Alan Ratner: Got you. Okay. Great. And then on the margin guidance, I think if I'm looking at this correctly, adjusting for the kind of charges this quarter, it implies about maybe 70 basis points of sequential pressure on an apples-to-apples basis in 1Q. And I think that's pretty in line with like your typical seasonal pullback in 1Q. Maybe Hilla, you could just refresh my memory. I believe there is some seasonality in your margins. So should I interpret that guide as kind of a flattish guide adjusting for seasonality? Hilla Sferruzza: Yes, you're exactly right. So when you look at the midpoint of our closing units versus where we were in Q4 for closings, we've typically said there's up to 100 bps of loss leverage in margins. So you're seeing that in the guidance for Q1. Maybe a little bit of an incentive environment in Q4, still closing in Q1, maybe some of the December noise. But for the most part, what we're seeing right now is holding steady with some hopeful green shoots from the spring selling season. Alan Ratner: Got you. So that seems pretty encouraging, I guess, just given the trends that we saw through '25, it feels like maybe things are firming up a little bit. And I'm sure a lot of that has to do with the gentle pivot you guys are making, maybe a little bit more balance between pace and price. But as we think about the remainder of '26, recognizing you don't give guidance, can you just kind of talk through what the potential headwinds and tailwinds could be, assuming you do solve for that flattish volume outlook, which feels more conservative than certainly the expectations you had coming into this year? Phillippe Lord: Yes. And absolutely. I think the biggest tailwind is our starting backlog. As we said, we intentionally chose not to chase the incentives in Q4 during a time of seasonality, consumer confidence fell weak. We saw a lot of builders trying to clear out old inventory, and we felt like we have a better return on our inventory in Q1 than we did in Q4. So that starting backlog is really what we're trying to overcome, even though we have higher community count growth, and we still expect to, on average, sell around 4 a month, trying to overcome that starting backlog is going to be the big goal. So if the spring selling season is better than we think and the incentive environment moderates and some of the competition stabilizes, I think that's the tailwind. The headwind is the higher rates that are still out there. Obviously, that's pressuring the entry-level buyer more than the move-up buyer. And then certain regional nuances as we look for better performance in Florida, better performance out West. So it's just a lot of still unknowns right now. And then the #1 headwind that everyone knows about is consumer confidence, which is ultimately, I think, a bigger deal than affordability right now. And hopefully, the consumer starts to feel better about things as we move throughout the year. Hilla Sferruzza: So I'll add 2 other points. And Alan, as you know, we don't guide full year margin at this point, so we can't give any specifics. But 2 things to consider, we've mentioned that we're already seeing some moderating in the cost, how expensive it is for us to buy rate lock. So assuming that trend continues, there's a potential improvement during the year. We can't sit here on the 29th of January and predict what rates are going to do. But if the trend holds or improves, I think that's an opportunity for margin. And then the other item we mentioned in our prepared remarks, we've seen some pretty fantastic savings on direct costs, 4% year-over-year as we close out the year. So as you guys know, we have quite a nice volume of existing inventory that we're going to go ahead and sell through Q1 and part of Q2. But as you see some of those newer homes coming through, their direct cost should be at the lower basis. So even holding everything else even, there should be some savings coming through on the lower direct. So again, there's no specific numbers that we're providing at this time. But directionally, those are 2 things that we can look to as we look to the rest of 2026. Operator: And we'll take our next question from Michael Rehaut with JPMorgan. Michael Rehaut: I wanted to first delve in a little bit to your statement earlier, Phillippe, where you said you were encouraged in January, maybe around demand trends. And you also kind of said that you hope or expect the spring selling season to be better. When you say better, I guess, I was just wondering if that's better than the fourth quarter, so in line with normal seasonality or better versus the spring selling season from a year ago? And also, what signs or data points are out there that give you that encouragement in terms of what's happened so far in January? Phillippe Lord: Sure. I think better than Q4. I'm not sure if it's going to be better than last spring selling season. last spring selling season wasn't too bad. We were selling well over 4 a month in Q1 and Q2 of last year. So I'm optimistic that we can get back to 4 a month here in Q1 and Q2. Why am I optimistic? I think Q4 was really bad, I would say that to start out with. But generally, as the year slipped, we started to see better prospects throughout our funnel. The realtor community indicated to us that more buyers were out. They had more people that they were working with. The first couple of weeks of January were much better than the first couple of weeks of November and December. And so for all those reasons, we felt pretty good. The incentive utilization out there seem to start moderating. We saw less discounting by builders. So there was a lot of good things that we saw out there that give us hope and optimism about the spring selling season. But it's just a little too early to tell if that's structural or temporary because people pulled out of the market so hard in Q4 and they're reentering in Q1. And obviously, the storm has really shut down a big part of the country as well. So we're -- it's hard to exactly see what's happening with that as well. Michael Rehaut: Okay. No, I appreciate that. I guess, secondly, I'd love your thoughts around some of the administration's comments with regards to share repurchase. I'm sure you've obviously seen the comments by Bill Pulte around share repurchase versus core investment. And if you have any additional color, if you have any contact with administration officials or any thoughts around those comments, specifically as it relates to your intention for a higher level of share repurchase in '26? Phillippe Lord: Yes. We obviously take the federal government very seriously. We want to partner and collaborate with them. Our whole strategy as a company is around affordability. We have one of the lowest ASPs in the industry. 90% of our product is below FHA. We carry a bunch of specs to solve the void of the lack of affordable housing. So we are all in on whatever we can do with the federal government to continue to unlock the buyers that are basically priced out of the market. But we also believe that buybacks are a big part of our balanced approach to investing in operational growth and returning capital to our shareholders. So we balance those things out. We're still growing our business. We're still carrying specs, but we also have the ability to return more capital to our shareholders, which is the responsible thing to do. When our stock is trading at a significant discount to intrinsic value, the best investment I can make for our shareholders is to buy our existing enterprise at a discount, and we're going to do that as long as the support is there and there's no unintended consequences, which currently I don't see. So that's what I know today. We're learning more each and every day. We're working with the federal government when they ask for our input and our perspective, and we'll continue to navigate it as best we can. Operator: And we'll take our next question from John Lovallo with UBS. John Lovallo: So the delivery outlook for the full year is essentially flat year-over-year. The first quarter is down about 8%, which seems to imply that we return to year-over-year growth in the second quarter through the fourth quarter. So I guess the question is, is it fair to assume that sort of the newer strategy of driving the highest volume and margins in the first quarter and the second quarter may be pushed out a bit maybe into 2027 rather than this year? Phillippe Lord: We'll see, right? I think we're going to see how the incentive environment evolves here over the next 5 quarters, if it stabilizes and we're able to go out and get 4 a month in a profitable way and not compromise our land book, we're going to go do that as quickly as we can. So we'll just see how things go. The real challenge with our 2026 outlook versus 2025 is just how we're starting out the year. The backlog is down. We just came off a pretty slow Q4, and we're intentionally thinking about Q1 a little bit more conservatively until we understand that incentive environment. But at the end of the day, we're looking to optimize our business at 4 a month in almost every scenario, except where it becomes so inelastic that the cost of that incremental demand on a community-by-community basis is too material. Hilla Sferruzza: I just want to clarify, there's a difference between sales and closings, obviously. So the spring selling season, that doesn't change. That's going to be the healthiest volume of sales per community. Again, community count is distorting the discussion a little bit. But per community, we should see the kickoff of the spring selling season in February kind of winding down in May. So you're going to see a healthy volume of sales in Q1 and Q2. Now when those sales convert into closings, that's typically Q2, Q3, right? So our sales in April and May are going to close partially in Q2, but also in Q3. So I think that you're going to see some of the volume from the spring selling season closing out in Q1, but more materially so in Q2 and Q3, although the sales volume should be coming through in those 2 first quarters. So hopefully, that helps. John Lovallo: Okay. Great. And then I guess the next question is I just wanted to talk about the community count growth, which has been you're very strong here for some time. And I'm curious if you're seeing what we would typically expect to be stronger kind of conversions within those newer communities than you are in kind of the existing communities. Is the absorption pace better as we would expect? Phillippe Lord: Modestly. I mean, probably not what we would see in a traditional housing environment with stable consumer confidence, reasonable affordability. I think we always expect to sell more houses when we first open a community, there's a certain fresh and new opportunity for people to own a home. People like to be the first in the community. But I would say over the last couple of quarters, it has been much more modest than we would traditionally see out of our new stores. So as we look at the new community openings in 2026, we're not modeling them with elevated absorptions to start out at the inception of the community. Operator: And we'll take our next question from Rafe Jadrosich with Bank of America. Rafe Jadrosich: I just -- I wanted to ask on the SG&A. Can you talk a little bit about the potential cost savings from the cuts you made in the fourth quarter? What's the annualized -- how do we think about like the annualized benefit from those cost reductions? Hilla Sferruzza: Yes. So we're not providing a full annualized benefit yet as part of it is a function of the performance in 2026. You can see that we mentioned that we had severance as a component of both SG&A and in margin depending on what type of employee was impacted. So we have a fairly material impact on a go-forward basis from those savings, although a lot of those savings are also just going to be coming from other opportunities. You've heard us talk about increased technology spend for the last several quarters, and we're starting to see the benefits of that technology spend on a go-forward basis as well, not just in lower spend, but in improved efficiencies in our back-office operations. So on top of all the regular things that most folks are also doing, we've cut any excess events or any SG&A that was more discretionary. The overhead count saves should definitely translate into some year-over-year SG&A leverage lift, even though we're guiding to the same-ish revenue, we are looking to see a saving in our SG&A leverage for full year 2026, but we're not providing specific guidance. Rafe Jadrosich: Okay. That's very helpful. And then just how do you think about the -- it's obviously good to see the step-up in share repurchase that you announced during the quarter. How do you think longer term about the right level of debt to cap? And is there an opportunity to increase off-balance sheet from where we are today? Hilla Sferruzza: Yes. So we're pretty comfortable with the low 20% net debt to cap as a long-term target. We've said if there's anything unique or unusual that temporarily takes us above that, and we can see a very clear path to coming back below it in a quick time line, we would consider it, although we're not all that close to it right now. So we're not contemplating going above that threshold. We definitely are looking at more off-balance sheet vehicles. We appreciate that there's an ability to continue to both reinvest back in Meritage and in shareholder returns. with an increased utilization of off-balance sheet vehicles. So it's something that we're very, very focused on and are looking to dig into deeper. Unfortunately, the ratio got a little bit off balance this quarter because of our intentional 3,400 unit lot termination. So our relative ratio at the end of the year looks a little bit skewed, but it's definitely our intent to double down on off-balance sheet partnerships and relationships, and you should see that percentage increase throughout 2026. Operator: We will take our next question from Stephen Kim with Evercore. Stephen Kim: First question, I'm curious about the margin impact we might be able to expect purely from volume deleverage if your closings per community move below 4x, 4 per community per month this year, which I think you said earlier in the call that you would do that on a temporary basis. So like if we assume that there's no change in incentives, is there a decremental margin on a per community basis or some other kind of rule of thumb that would help us quantify what the margin impact from sales per community moving below 4, let's say, they moved to like 3.5 from 4 or something. Is there some rule of thumb that we can think about that would quantify a margin impact from that deleverage? Hilla Sferruzza: Unfortunately, it's not that easy. Many of our communities share superintendents and there's some leveraging that can be picked up, especially with our cross-selling initiatives that we have some multiple folks working across several communities. I wouldn't expect a small pullback to have an impact. But if it was a larger pullback in your example from 4% to 3.5%, there would be some impact. I don't think it would be more than 20, 30, 40 bps if that was consistent for the entire year, but I don't know that there's a rule of thumb kind of like what we do for the leveraging between the first and the fourth quarters. Stephen Kim: Got you. Okay. That's a helpful framework. I guess the second question is sort of a broader one. It relates to the move-in ready strategy, the 60-day guarantee close and the reliance on realtors. I sort of think about that as a strategy, which was born out of an environment when there was an extreme scarcity of existing homes for sale. But if we were to see existing home inventory rise and let's say, return to sort of historically normal levels, in your view, would that diminish the attractiveness of the move-in ready strategy? And would you be open to changing it? Phillippe Lord: Well, we're open to changing anything if it makes sense. But I think it was less about what was happening over the last 5 years with the existing home market being locked in and more about the fact that other than location, why do people ever buy a used home versus a new home. And ultimately, when new homes are at such a great value to existing homes, even more so today than they've ever been before, you can get homeowners insurance, your warranty cost is lower, they live better, they are more energy efficiency. The idea that anyone could convince someone to buy a used home versus a new home just doesn't make any sense to the folks over at Meritage Homes. So our strategy is built around when that existing home market comes back, you have a compelling option to buy a new home with no compromise other than whether it's not in the school district you want to live. And so that is what the strategy is based on. It's not based on the lock-in effect. Hilla Sferruzza: Yes. I mean, you said it better, but it was designed for when the resale market returns, not for when it was not in place. Stephen Kim: Got you. Yes, it's more like saying that you can compete better against resales. So why not accentuate that? That's really the emphasis, right, basically? Phillippe Lord: That's correct. And that's the whole realtor piece because the realtor really influences that buying decision. And they're a big influencer of why people buy used homes instead of new homes, and we're trying to partner with them in a way where they would consider buying a new home over buying a used home and it's in the best interest of everybody. Operator: And we'll take our next question from Jade Rahmani with KBW. Jason Sabshon: This is Jason Sabshon on for Jade. When mortgage rates have dipped in the last few months, have you seen builders maintain mortgage buydown levels or reduce them in concert with rate? And do you think builders will pass along savings to customers or try to get better margins? Phillippe Lord: So as rates have ticked down a little bit, the cost of rate buydowns have definitely shrunk moderately. Some builders have chosen to buy rates down further when that happened, while other builders have maintained the rate buydown where it was, and therefore, that cost has shrunk. I think some builders have reallocated those incentive dollars to other incentives to continue to try to overcome consumer confidence. I believe if consumer confidence were to come back, I believe that builders would pull that back into either margin or additional savings for their customers depending on their particular community and their particular market. So I'm not sure I answered your question because the answer is probably all of the above, depending on who you are and what your strategy is and where your community is. Hilla Sferruzza: I would say if you look at margin guidance from the peer group for everyone that's already released, I don't think most folks are taking it back to margin, right? Most folks have guided to lower margins in Q1 with a moderating interest rate environment. So I think the expectation is to continue the status quo until we see a stabilization in demand and then you can make decisions. Jason Sabshon: Got it. That's helpful. Then separately, what drove higher other income during the quarter because we were expecting a dip due to lower rates. Hilla Sferruzza: Yes. It was actually a little bit of a combination of a higher-than-expected cash balance, and we were actually earning interest a little bit longer. And then we had some pickups in legal settlement. There's always ups and downs. It's a tough to model line item, which is why we kind of usually stay silent on it. Operator: And we'll take our last question from Alex Barron with Housing Research Center. Alex Barrón: I think I heard you say that the percentage of homes that are bringing in or using a broker is like 90%. If that's accurate, are you guys paying just the standard commission? Or do you guys use some type of incentive structure, bonuses or anything like that? Phillippe Lord: Yes. We pay market rate commissions. So depending on which market we're in, whatever everyone else is paying, we pay the same. We do have some incremental loyalty programs if you sold more than 1 home or 2 home or 3 homes, so that's -- but those are pretty small dollars. So generally, the increase in our cost is just the fact that we're at 90% versus whatever other builders are at. Otherwise, it's pretty much market. Hilla Sferruzza: Interesting data point we can share. 40% of our volume is repeat volume. So it's not a one and done. So I think that the benefit of our loyalty program and our intentional pivot towards a stronger relationship with the realtor community is definitely paying off since we're seeing very high volume of those realtors come back with customers more than one time. Alex Barrón: So what's the feedback they're providing to you as to why it's that high? Is it mainly the 60-day guarantee and the fact they get paid faster than build-to-order or something like that? Phillippe Lord: Yes, I don't want to give out all of our secrets over here. But I think, obviously, the #1 factor is that we're able to meet their customer on their time line, right? So when they commit to their customer being able to move, they're able to move at that point, and there's no negotiation there. The home is going to be done, done, done, you're going to move in. I think that realtors generally feel that, that's the same with realtor with existing homes. But the second is also just the transparency. The price is the price, and you're getting a good deal, and you can work with us in a way that feels like working with the existing home market. But yes, I mean, you nailed it. A big part of it is just delivering the home on time and guaranteeing that. Alex Barrón: That's great. If I could also ask on incentives that you guys did this quarter versus the previous quarter, like what percentage of ASP do they comprise? Hilla Sferruzza: Yes. Since we're 100% spec builders, we don't provide incentive detail. There is no base price and then you have some incentive off of that price. We just have an all-in price because our homes are sold to complete. So we don't provide that, although we'll share the same commentary that we've shared the last couple of quarters. We're running more than a couple of hundred bps above historical averages, which is why we have a good level of confidence that once things return to normal, our target gross margin of 22.5% to 23.5% is very realistic because that reflects -- the current numbers reflect that elevated incentive market. Phillippe Lord: Thank you, operator. I'd like to thank everyone who joined the call today for your continued interest in Meritage Homes. We hope you have a wonderful day and a wonderful weekend. Thank you. Operator: Thank you. This concludes today's Meritage Homes Fourth Quarter 2025 Analyst Call. Please disconnect your line at this time, and have a wonderful day.
Operator: Good morning, ladies and gentlemen, and welcome to the Colony Bank Fourth Quarter 2025 Conference Call. [Operator Instructions] This call is being recorded on Thursday, January 29, 2026. I would now like to turn the conference over to Brantley Collins. Please go ahead. Brantley Collins: Thanks, Danny. Before we get started, I would like to go through our standard disclosures. Certain statements we make on this call could be constituted as forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Current and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance but involve known and unknown risks and uncertainties. Factors that could cause these differences include, but are not limited to, pandemics, variations of the company's assets, businesses, cash flows, financial condition, prospects and other results of operations. I would also like to add that during our call today, we will reference our fourth quarter earnings release and investor presentation, which were both filed yesterday. So please have those available to reference. And with that, I will turn the call over to our Chief Executive Officer, Heath Fountain. T. Fountain: Thanks, Brantley, and thank you to everyone for joining our fourth quarter earnings call today. We are pleased to report our fourth quarter with strong operating performance. Our team has done a great job of delivering results and executing on our strategic initiatives. We're really excited about the legal close of the TC Federal merger, which occurred at the beginning of December, and we're on track to complete the systems conversion during the first quarter. Both teams have done a great job to get us to this point, and we're looking forward to the upcoming customer integration. We're also pleased to report that our financial targets for the deal are on track or better than expected, as Derek will discuss later on the call. Operating earnings continued to improve with an increase in operating net income of $675,000 compared to the third quarter. This was driven by continued increase in our net interest margin as well as a strong quarter in terms of noninterest income. As we mentioned early last year, our projections indicated achieving a 1% ROA latter half of the year and maintaining 1% or better going forward. We were able to hit that target in the second quarter and maintain it through the rest of '25. I'm proud of our team's accomplishments in being able to do this and report that we've achieved a 1% operating ROA for the 2025 fiscal year. We now set our sights on our next goal of a 1.20% ROA and believe that we can achieve that on a quarterly basis starting in the second quarter of 2026 once we get the full benefit of the TC Federal merger and expect to hit the 120 mark for the full year of 2026. In 2025, we saw core loan growth of 10.5%, excluding the impact of the TC Federal acquisition. Our outlook on loan growth for 2026 remains positive and our pipelines remain strong, but we are seeing a trend where we think we'll be closer to the 8% end of our 8% to 12% long-term target. We've seen an increased competition in lending across our footprint. However, we remain focused on growing core customer relationships. This strategy has allowed us to maintain a disciplined approach to pricing and credit while still achieving our growth goals. With expected loan growth and repricing opportunities, we project margin to increase at a modest pace throughout 2026 around mid-single digits each quarter. In addition, we feel good about the outlook on the noninterest income side and expect it to be slightly better in 2026 as we continue to see improvement in our lines of business and fee income. Deposits were up for the quarter and organically flat year-over-year, excluding the acquisition of TC Federal. We are driving deposit account growth and our team is focused on building the deposit first and relationship banking culture. At the same time, we're also focused on improving margin and have moved our interest-bearing accounts aggressively during the recent rate cuts this cycle, which has caused us to lose some non-relationship price-sensitive accounts. We carefully monitor this and believe we can grow the right kinds of deposit relationships. And as rates stabilize, we will become more competitive for interest-bearing deposits as well. In the fourth quarter, we executed a portfolio mortgage pool sale of around $10 million with a gain of a little over $100,000. Our loans held for sale balance also increased quarter-over-quarter, and we're expecting to sell another $30 million of portfolio mortgage loans in the first quarter of this year. There's a couple of reasons why we're doing this. First, the secondary market for non-agency loans has improved, and we're now able to push some previous quarter's mortgage production into the secondary market. Second, with the addition of TC Federal, we knew we'd be expanding our 1-4 family portfolio. So to manage that concentration, we feel it's prudent to trim some mortgage loan exposure. Operating expenses were higher in the fourth quarter as we have not yet realized all of the expected cost saves from the TC Federal acquisition. As we complete the systems conversion in the first quarter, we anticipate a majority of those remaining cost savings to occur after the conversion and be realized in the second quarter and going forward. Charge-offs were lower in the fourth quarter, but still elevated slightly compared to earlier quarters. Charge-offs have primarily come from our SBSL division, and we provide a breakdown of the net charge-offs on Slide 34 in our investor presentation. We saw some charge-offs from our marketplace loan partners in the fourth quarter, but do not expect that to be a long-term trend. SBSL and marketplace loans only represent about 5% of our total loan portfolio. And as you can see on that slide, bank net charge-offs remain at low levels and gives us confidence in the credit quality of our overall portfolio. We also outlined the yields in those categories, and it's important to note that both of these third-party marketplace loans and SBA loans provide higher yields, which offset charge-offs and provide for a nice risk-adjusted return. Additionally, of course, on the SBA loans, we've also generated significant gain on sale income on the guaranteed portion of those. Our performance in complementary lines of business are highlighted on Slide 19 on a pretax basis. SBSL and mortgage finished the year with a strong fourth quarter, and we continue to see improvement in Marine/RV-Lending as well as Merchant Services. We welcome the addition of 2 new proven financial advisers -- financial advisers to the Colony team in the fourth quarter, Glenn Ware in LaGrange and Tim Owens in Macon, and they have been successfully transitioning their client base to Colony. With the addition of Tim and Glenn, we've also begun the transition of our relationship with our broker-dealer, Ameriprise from a managed program to a dual employee model, where our financial advisers are employed by Colony and where we receive the majority of the revenue, but also bear the full expense load. As we more than doubled our assets under management from about $200 million at the end of 2024 to over $460 million at the end of 2025, we believe this transition will be beneficial for the long term and offers more flexibility for our advisers while maintaining the relationship with our broker-dealer. Overall, this structure will provide increased income opportunities going forward. Some of the related expenses to that occurred in the fourth quarter, and we expect to be fully transitioned by the end of the first quarter of this year. The building out of this platform is an important piece of our long-term strategy, and we are actively recruiting to continue to grow this line of business. Slide 23 illustrates the year-over-year improvement with Colony Insurance and shows significant increases in Items and Premium in Force. Bank referrals to insurance increased 20% in 2025. We've been in a very hard insurance market the last couple of years, facing significant rate increases from our carriers for our customers, which has had an impact on retention rates, but we are starting to see the market soften some and believe we will see improvements to retention and production in 2026. Yesterday, the Board declared an increase to our quarterly dividend to $0.12 per share, which is an increase of $0.02 on an annualized basis. Dividends are important to many of our shareholders, and we're proud to increase the dividend for another consecutive year. I'd also like to recognize that Colony Bank has been named one of American Bankers 2025 Best Banks to Work for. This is a tremendous accomplishment and reflects our commitment to culture and to our team members. I'm grateful for everything our team members do to support each other and the customers we serve. Colony was the only bank headquartered in Georgia to be recognized on this list in 2025. We continue to see opportunities to capitalize on the increased M&A activity in the industry and across our footprint. This includes opportunity for new customer acquisition, new talent acquisition and expanded fee income as we develop deeper customer relationships across our existing markets. As I mentioned earlier, our team is focused on the integration and core conversion with TC Federal in the first quarter. At the same time, we continue to see an increased level of activity from an M&A perspective, and we are actively having conversations with potential M&A targets. We're at a place where we feel comfortable moving forward with another opportunity, and we believe that given the level of conversations and activity we see in the industry, we'll have the opportunity to announce another transaction at some point in 2026. Slide 14 in our investor presentation lays out our approach to M&A opportunities. The strong momentum exiting 2025 positions us well as we enter 2026. We remain optimistic about the opportunities ahead and are focused on continuing to enhance performance through disciplined execution and ongoing improvement. With that, I'm going to turn it over to Derek to go over the financials in more detail. Derek Shelnutt: Thank you, Heath. From an operating income perspective, we saw net income increase $675,000 in the fourth quarter, driven by the completion of the TC Federal acquisition as of December 1 as well as continued increase in margin and solid results from many of our complementary lines of business. Operating pre-provision net revenue improved again in the fourth quarter and was a significant improvement over the fourth quarter of 2024. We continue to see positive improvement in our core earnings. Net interest income increased approximately $3.2 million compared to the prior quarter and was a product of continued improvement in earning asset yields, a reduction in cost of funds and the addition of TC Federal in December. Net interest margin increased 15 basis points to 3.32% in the quarter. Loan yields increased to 6.19%, up from 6.15% in the previous quarter and reflects continued positive loan repricing, the addition of 1 month of TC Federal loans and the related accretion income, which was slightly offset by the reset on variable rate loans due to the short-term rate cuts. The impact of the short-term rate cuts was captured in our overall cost of funds, which decreased to 1.96% for the quarter, and that is down from 2.03% in the third quarter. The short-term rate cuts from the Fed helped drive those fund costs lower in addition to the seasonal inflow of the lower cost deposits that we typically see later in the year. We may see some slight variability in accretion income depending on the timing of payoffs and paydowns from the acquired TCF loans. Going forward, as we receive payoffs of acquired loans that were marked to fair value, we are then able to deploy those funds at current market rates, resulting in minimal impact to overall interest income. We're still projecting a modest increase in net interest margin each quarter throughout 2026 as we continue to see repricing of cash flows from lower earning assets. Fourth quarter operating noninterest income was $11.1 million, reflective of a good quarter from many of our complementary business lines, particularly mortgage and SBSL. Slide 19 gives an overview of the pretax performance of our complementary lines with a noticeable improvement overall from the third quarter. Mortgage-related noninterest revenue increased $270,000 from the prior quarter. And as Heath mentioned, we did have a $108,000 gain from a sale of portfolio mortgage pool of about $10 million during the quarter. Marine/RV-Lending continues to improve on a quarterly basis in addition to improvement in our Merchant Services division. Heath also mentioned the conversion with Colony Financial advisers from a managed program to a dual program, along with the addition of 2 financial advisers. There are some upfront expenses associated with that strategy. And although we will see expenses increase with that change, the dual program will allow us to receive a larger share of dealer commissions, which will outweigh the increase in expense and ultimately improve the earnings power of that division, leading to increased net income. Typically, the fourth quarter is a lower volume quarter for Colony Insurance based on the timing of policy renewals and seasonality. We expect this to revert back to normal in the first quarter and improve into the rest of 2026. Operating noninterest expenses were $24.4 million, and the increase is attributable to the TC Federal acquisition. We're still carrying some TC Federal-related expenses until the systems conversion in mid-first quarter and then expect those expenses to drop off for the second quarter of 2026. This led to a higher net noninterest expense to average assets of 1.58% for the quarter and a little higher than our historical average. We expect that to be closer to our target of 1.45% in the second quarter as we capture the remaining cost savings for the merger. The focus of disciplined expense management relative to our growth and earnings remains a priority for us as we continue to execute on our strategic initiatives that improve operating efficiency across the organization. Merger-related expenses totaled $1.3 billion for the quarter and were an adjustment to operating earnings. Provision expense totaled $1.65 million for the quarter. That's an increase from $900,000 in the prior quarter. Net charge-offs for the quarter were $1.6 million, a slight decrease from the prior quarter. Charge-offs were primarily driven by SBA loans as well as some marketplace loans from our third-party partners. As Heath mentioned, SBA and marketplace loans represent about 5% of the portfolio. Slide 34 shows a breakout of charge-offs between those product types and the bank portfolio. And in addition, Slide 34 also provides a breakout of loan yields in those categories. As we look forward to 2026 in regards to SBA charge-offs, we feel that we will see improvement compared to the trends that we saw in 2025. That expectation is supported by the underlying collateral of classified SBA loans. Classified and criticized loans increased from the prior quarter and 68% of that increase came from TC Federal for criticized loans and 93% for classified loans. Nonperforming loans increased quarter-over-quarter. $6 million of the $9 million increase in nonperforming loans was due to the acquisition of TC Federal and any anticipated losses were captured through acquisition accounting. We early adopted the new CECL-related accounting standard, and this resulted in no CECL double count as part of the acquisition. The credit quality of TC Federal's loans were reflected in the adjustment to the allowance for credit losses as part of the purchase accounting. Loans held for investment increased in the quarter due to acquired loans from the TC Federal merger. Organic loan growth for the quarter was flat, but was due to fourth quarter payoffs of both Colony loans as well as some legacy TC Federal loan payoffs in December. There was also $50 million in mortgage loans reclassified from held for investment to held for sale as we continue to market those loans for a pool sale. Organic loan growth for 2025 was around 10.5%, and we anticipate organic loan growth for 2026 to be slightly less towards the lower end of our 8% to 12% target. Slide 35 shows the weighted average rate on new and renewed loans of 7.33%, a decrease from the previous quarter due to rate cuts and changes in the rate environment. We expect to see that yield fall closer to the prime rate. However, that still leaves room for loan yields to improve from loan repricing. Fixed rate loan roll-off for 2026 is below 6% and noted on Slide 28. Slide 35 highlights loans acquired through the TCF merger as of the acquisition date and also notes the early adoption of the new accounting standard related to CECL. Total deposits increased from the prior quarter, also a result of the merger. Excluding acquired deposits, total deposit growth was around $24.3 million in the fourth quarter and flat for the overall year. As Heath mentioned, when the Fed started cutting rates in 2024, we began to lower our higher cost deposit rates aggressively, and that continued with the rate cuts in 2025. This is reflected in our cost of funds, which was 1.96% last quarter compared to a high of 2.32% in the third quarter of 2024. We believe we have a lot of opportunity in both current markets as well as the legacy TC Federal markets to continue to develop core customer relationships that will drive deposit growth. We acquired the TC Federal investments during the quarter, which were marked at fair value. A small portion was sold at the acquisition date and did not generate an earnings gain or loss. We didn't sell any other securities during the quarter. We'll continue to evaluate the need for future sales based on market conditions and balance sheet needs. The fair value of the portfolio improved quarter-over-quarter and resulted in a positive impact to AOCI of around $2.5 million. Total share repurchases during the quarter were 47,000 at an average price of $16.50. And as Heath mentioned, this week, the Board declared an increase to our quarterly dividend of $0.12 per share. Our TCE ratio at the end of the quarter was 8.30% compared to 8% even in the prior quarter. Tangible book value per share increased to $14.31 from $14.24 in the prior quarter due to better AOCI position, favorable purchase accounting and the early adoption of the new accounting standard that removes the CECL double count. Slide 16 illustrates some of the highlights from the merger with TC Federal. We're on track to achieve our projected cost savings, and we'll see more impact from that in the second quarter. The deal economics remain strong and forecasts are better compared to what we projected in our earlier modeling. Tangible book value dilution was less than expected, and our original forecast for earn-back was less than 3 years. We now expect that earn-back to be less than 2.5 years. We've also provided projections on expected 2026 base case earnings impact from the accounting treatment on acquired assets and liabilities. That concludes my overview, and now I'll turn it back over to Heath before we take questions. T. Fountain: Thanks, Derek. And again, thanks for everyone to be on the call today. We're really pleased with the quarter we had and the performance, both for the quarter and the overall year. This wraps up our prepared remarks. And with that, I'll call on Danny to open up the line for any questions. Operator: [Operator Instructions] Your first question comes from Christopher Marinac of Janney. Christopher Marinac: Thank you for all the details in the presentation and in the press release. I wanted to look at the small business lending line and just sort of think out loud with you about -- does that business become a higher risk-adjusted business for you and perhaps you have a little higher charge-off going forward, but it has a better return. Is that how we should think about that? And then do you see that business being a bigger contributor as the next year or 2 unfold? T. Fountain: Yes. Great question, Chris. And I think if you look at the way that business operates, it's certainly higher risk lending and the team we have has done a great job. Going back a couple of years, we have the opportunity to do some higher volume of higher risk but higher return loans that have both high yields and low cost to originate with the Flash and Lightning programs. And then with some changes, those went down. So I think a lot sort of depends on the opportunities that the programs may have and change. I think the general, I guess, bread and butter kind of 7(a) and the little USDA business kind of remains constant, not a super higher than normal, but the opportunity potentially with -- like we took advantage of with the Lightning and Flash programs that had a higher return, but also a higher loss rate. So it kind of depends and could vary. I mean the challenge with that business is that the income is not as steady, but it's such a good ROE contributor that it's a really great business to have and be in. I don't know that we'll go back to the level it was a couple of years ago when it was -- we were originating all those small dollar loans, but we expect it to improve sort of from the run rate we had this year. Christopher Marinac: Great. And as you look at M&A as a line of business these next several quarters and years ahead, do you think that you'll have competition for some of the banks you're looking at? Or do you think they're more negotiated transactions where you can kind of pick and choose really where you want to be in various markets and various companies? T. Fountain: Yes. So our hope is in as many cases as possible for us to have the opportunity to do negotiated or what I would call limited marketing type deals where much like on the TC Federal, where the seller is looking for a buyer with alignment to what they're doing, where it's more of a partnership than just a true sale. And I think just based on the conversations we have and what we're seeing in the market, there'll be opportunity to do that. At the same time, there are bid situations that come up. Some of those look attractive to us. But I think our ability to execute on those will be fewer and further between because just from a pricing perspective, I think we're going to price those not as aggressively maybe as some others. So we may hit on some if the competition happens to be lighter because of capacity or market or whatever it may be. But I think the real opportunity and the way I would describe it is I think we're going to have opportunity to do plenty of M&A over the next several years. Our job is to make sure that it's the best possible deals that we can do for our shareholders, for our team for the combined companies. And so that means as many as we can be involved in being more of a limited process where they see the value and the upside partnering with Colony. And I think there'll be other opportunities to do that. And I think that's what Greg and the TC team saw. But that means more work on our part hitting the streets and getting out there and having conversations and being involved in things and just courting other bank management teams. Christopher Marinac: Sounds good. And just last question for me just has to do with sort of new hires within your footprint on the lending and deposit side. How does the flow of that? And what would be the outlook in general? T. Fountain: Yes. So a couple of things there. I don't see us being on a very aggressive hiring spree in terms of trying to add a certain number over the next period of time. I think that our current team can -- with the opportunities we have, there is plenty of opportunity for organic growth with our current team. That being said, we will be opportunistic for hires within our footprint, particularly as it comes to displacement from other M&A activity. And so I think there's going to be opportunities for that. But I would say they would be more in the one-off areas than big massive teams or looking to hire large numbers across our footprint, more in the handful, I think, type area. Operator: Your next question comes from David Bishop of Hovde Group. David Bishop: A quick question. I think Heath or Derek, you touched on the organic growth profile maybe slipping a little bit towards the lower end of the longer-term guidance. And obviously, the Southeast, the regional economy remains very strong, always very healthy pricing competition. Maybe just talk about some of the puts and takes in terms of the growth you saw this quarter on an organic basis and what you are seeing in terms of the competitive environment on the commercial side? T. Fountain: Yes. So it's definitely getting more competitive. I think that what we've been trying to do and what we've been able to do is price things from a relationship perspective, be willing to be disciplined on that, walk away from deals that don't hit return objectives for us, be very focused on relationships. And so that's limited the growth a little bit, but it was important and continues to be important for us to expand our margin and our profitability. And so we're just balancing those needs, I think, Dave, and trying to make sure that we continue to see margin improvement. We continue to price things attractive -- where it's attractive. But also, I think, reflective in our outlook and guidance and like what Derek talked about and what we think we're going to see loan yields come into, we're going to need to be a little more competitive on that front in order to get the kind of growth that we want from a pricing perspective, just given where the market is and where competition is. So we'll see that. I think Derek indicated coming down off of the [ 7.33 yield ] closer to where prime is on lending. And I think that's sort of what it's going to take. I think as rates settle out and they get more stable, I think the competitive range of pricing is going to narrow again, it's pretty wide right now, and we see some pricing where we just aren't going to price things. And so -- but I think as expectations for rate cuts kind of stabilizes and I think the market thinks will get maybe one more cut now, that's more stable. I think that range of pricing that we see out there narrows in as well. And so I think that, that will help. I also think another big positive is not just the economic environment is good in the Southeast, but also because of the M&A, I think we'll see some turnover of assets from some of the larger banks that are going through M&A. But at the same time, you've got a lot of banks wanting to participate in that. For us, if we can stay in that 8% to 12% and also see margin improvement, we think that's the sweet spot to where we'll drive the most value for our shareholders. If we have to start doing things that are going to stop the margin improvement to result in higher growth, we just don't see that as the right trade-off for the long-term benefit of our shareholders. So that's what we're trying to balance, and I think our team is doing a really good job of that, but it's just a constant push and pull. David Bishop: Got it. Appreciate that color. Maybe sort of staying on the converse of that topic. Obviously, there's the puts on the loan side. On the funding side, I think, Heath, Derek, you mentioned that some opportunities, obviously, to grow some core relationships there. What is your sense that you can organically fund loan growth with deposits this year? And what sort of trends are you seeing on deposit pricing given the aggressiveness you've had this quarter? T. Fountain: Yes. And I'll share some thoughts and then, Derek, if you want to chime in anything else. But I think you'll see similar, Dave, like I was talking about with the rates on the deposits. We've been very aggressive trying to get the full amount of each rate cut out of our funding -- underlying funding and sometimes more than that with the rate cuts and I think others have been doing that, but I think some others have been trailing and lagging. So I think, again, as we -- let's say, we're going to get more and more rate cut, I think you'll see the competition start to narrow their -- the range of the competition from market to above market will be slimmer. And so that will allow us to be more aggressive at a time when that spread from conservative to aggressive is less, which is better timing for us from a margin perspective. Our team is focused primarily on the noninterest-bearing and interest-bearing DDA that doesn't carry a high interest balance. And so that's where we're out trying to generate most of the relationships. But as those rates stabilize, our ability to use interest-bearing DDAs as a sweetener to go get relationships or to get our foot in the door with relationships. I think we'll be able to use that more in the future. And so I think our deposit pipelines continue to grow. We have a lot of effort and focus on that. Our incentive for our bankers is based largely on that and less on lending than it has been historically. So we're getting the right kinds of behavior that we want to see from our bankers. And as that's picking up steam, our banking solutions group, which is how we've combined our treasury, our merchant services, our credit cards, all our payment functions together, they're picking up traction. We're getting good business development out of that area, and we think there's opportunity there. In the meantime, as that's picking up steam, we've got a little time where we're continuing to see the roll-off in our investment portfolio, and we start to get that down to levels that we want it to be in the long term. So we can have some switching of assets on the balance sheet from investments to loans while deposit generation starts to pick up. We feel confident, we can bring that all together at the right time and grow organically deposits to fund loans over the next few years. That may not match up each quarter, but we think deposit generation is going to continue to be something that we find the ability to improve quarter after quarter. Derek Shelnutt: I agree. And then on the funding front, we have about $65 million base case investments rolling off in 2026, and that's coming off at a [ 3.10 yield ]. So that's going to be able to reprice upwards coupled with the deposit growth. But as Heath mentioned, on the loan and deposit side, we're seeing a little bit more competition with the banks. The spreads are kind of coming together a little bit, but that ultimately translates back to our kind of forecast and projection of that modest margin increase throughout 2026. David Bishop: And I assume that incorporates, Derek, the impact of purchase accounting accretion, correct? Derek Shelnutt: That is correct. David Bishop: Okay. Got it. And then finally, circling back to M&A, Heath, I appreciate the Slide 14. Just -- as you are obviously getting bigger in size, approaching the $4 billion to $5 billion asset range, do you get the sense that maybe the ideal target is moving close to that $6 billion to $1.2 billion range as opposed to the under $600 million range? And any -- would you look to seek to potentially go over state lines like in the South Carolina and Alabama and such? Just curious from a geographic perspective. T. Fountain: Yes. Dave, great question. And from a geographic perspective, let me tackle that one first. Basically, we look at it as Georgia and the contiguous states. South Carolina, given that we operate 2 markets, Savannah and Augusta that are right on the South Carolina line. We already do a lot of business in South Carolina. We would love to see the ability to expand that way. In Tennessee, we are right at the border of Tennessee. And so any opportunity to move in that direction will be a natural expansion. Alabama, same thing. We operate markets right along the Georgia, Alabama line and do business in that state. So we'd like there's opportunity there as well as in Florida, we operate in North Florida, and we'd love to see opportunities there. Of course, saying all that, the sheer numbers of bank opportunities are much higher in Georgia than they are in those other states. So the number of opportunities is going to drive some of that. And I'd say same thing with size. We would love to do more sizable transaction just because it's going to drive more meaningful financial metrics. However, when you move up in size, the chances of more competition comes into play. And so it's just a -- I think if you just look at the numbers game, Dave, certainly, $1 billion and below or really even maybe $750 million and below. The numbers would tell you more likelihood at those sizes. But we continue to have conversations with banks above that and look for opportunities there as well, and we are prepared to execute on what opportunities may come about. And there's just so many factors in M&A that are timing that you can't control that's on the side of a seller and you've got to be willing to move and execute based on that. The good news is in this environment, if you have an opportunity to do a smaller deal, and you don't have a larger deal pending, you can get that one in, get it done. Approvals are happening quickly, and we would not be opposed to lining up more than one at the same time. I think our team can handle that. I think from a regulatory perspective, we're in an environment where you can do a very close succession of deals. And so that gives you greater, I think, flexibility to create value by doing a smaller deal, whereas maybe a couple of years ago, we would have looked at that and said, well, we better not do that smaller deal because it may put you out of the game for 18 months. And so I think this environment sets up nicely the ability to execute on some opportunities that I think will be great in building a great deposit franchise and great earnings and the ability to grow organically. David Bishop: That's great color. And I got one final -- I promise last question. Derek, you said that net operating expense ratio, you're trying to get back to that mid-140s by second quarter or so. And then maybe just some thoughts on the effective tax rate. I know that can bounce around. I don't know if that's changed with the merger. Derek Shelnutt: Yes. Great question, Dave. Yes, we try to -- we think we'll be able to get back to that 145 later in the year. We still have a lot of the expenses from TCF that we're carrying. And then after the first quarter, typically seasonality in our noninterest income business lines will increase. And with the addition of -- we have the [indiscernible] coming. And so there are several components we think that will drive getting us back to that number. So I think we feel pretty comfortable about moving back towards that rate later in the year after we get the systems conversion behind us. And then on the tax rate, right now, we don't expect any changes from the prior year just with the merger and everything. We still expect to be around that 21-ish percent effective tax rate. Operator: There are no further questions at this time. I will now turn the call back over to Heath Fountain. Please continue. T. Fountain: All right. Well, thank you, everybody, for being on the call. Thank you for the questions today, and thanks for all your support of Colony Bankcorp. We appreciate it, and that concludes our call for today. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning and welcome to the AXIS Capital Fourth Quarter 2025 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Cliff Gallant, Head of Investor Relations and Corporate Development. Please go ahead. Clifford Gallant: Thank you. Good morning and welcome to our fourth quarter 2025 conference call. Our earnings press release and financial supplement were issued last night. If you would like copies, please visit the Investor Information section of our website at axiscapital.com. We set aside an hour for today's call, which is also available as an audio webcast on our website. Joining me on today's call are Vince Tizzio, our President and CEO; and Pete Vogt, our CFO. In addition, for the Q&A portion of our call, we will be joined by Matt Kirk, our incoming CFO. I would like to remind everyone that the statements made during this call, including the question-and-answer session, which are not historical facts, may be forward-looking statements. Forward-looking statements involve risks, uncertainties and assumptions. Actual events or results may differ materially from those projected in the forward-looking statements due to a variety of factors, including the risk factors set forth in the company's most recent report on the Form 10-K or our quarterly report on Form 10-Q and other reports the company files with the SEC. This includes the additional risks identified in the cautionary note regarding the forward-looking statements in our earnings press release issued last night. We undertake no obligation to publicly update or revise any forward-looking statements. In addition, our non-GAAP financial measures may be discussed during this conference call. Reconciliations are included in our earnings press release and financial supplement. And with that, I'll turn the call over to Vince. Vincent Tizzio: Thank you, Cliff. Good morning and thank you for joining our call. The fourth quarter marked the close of an excellent year for AXIS as we built upon our track record of sustained positive results with 13 quarters of increases in diluted book value per share growth and 77% growth over that period. Our performance has been consistent and our actions have aligned with the core principles that we laid out at our Investor Day in May of '24. In 2025, this translated to strong results across our key indices as we leaned into attractive specialty markets, drove increased profitable growth that was largely propelled by our new and expanded business classes and further enhanced our operating efficiency. I'll share some of the headline metrics for 2025. 18% year-over-year increase in diluted book value per common share at $77.20, 18% operating return on equity, record gross written premiums of $9.6 billion, up 7% over the prior year and a combined ratio of 89.8%, our lowest full year combined ratio since 2010. We entered 2026 well positioned to advance our momentum and have confidence in our ability to execute. I'll share 5 key messages that we would like our listeners to take from this call. First, AXIS is built for all seasons. As a specialist, we have an operating model that enables us to leverage our size and speed to pivot as needed across our business lines and geographies, serving as a competitive differentiator in today's changing risk landscape. Second, we're poised for profitable growth driven by our strategic initiatives. We would point directly to our new and expanded business classes, as well as the growing contributions from our dedicated lower middle market units and our recently introduced AXIS Capacity Solutions as proof points. Third, disciplined cycle management. Our growth will not come at the expense of bottom line and we remain steadfast in putting profits above premiums. In recent years, we have instilled a culture of strong cycle management as evidenced by the repositioning of several of our businesses. You may recall the actions taken in primary casualty, cyber and public D&O as just 3 examples. Four, our global distribution model. Our multivariate distribution platform is grounded in customer centricity and deep broker partnerships that we've worked diligently to nurture. In our most recent annual broker survey, this was reflected by top quartile Net Promoter Scores and the recognition of AXIS in its specialty leadership positions. Five, finally, we've driven a performance culture. We have built a culture that is both results-driven and people-oriented, encouraging exceptional work through our pay-for-performance model. Further, in recent years, we've built a strong and talented team while providing a favorable workplace environment that has earned AXIS numerous awards and recognitions. In supporting each of these areas, we continue to invest significant resources to our How We Work transformation program, which is driving continued improvements across our business and operating model, leveraging enhanced technology and AI solutions. The investments we are making through our How We Work program are reflective of the commitment we made at our Investor Day to deploy $100 million to strengthen our operations and how we go to market. We accelerated these efforts in 2025 and indeed raised our investment threshold with an emphasis on scaling our new and expanded lines and integrating a new AI-enabled front end within our organization. We're pleased with the momentum that's coming from these investments. Let's now discuss our segment results. We'll begin with insurance. Our Insurance segment produced outstanding results in 2025, including several all-time highs, record gross written premiums of $7.2 billion, a 9% increase over the prior year, record new premiums written of $2.4 billion, record underwriting income of $597 million, a 40% increase over the prior year. And finally, a combined ratio of 86%, a 3 percentage point improvement over the prior year. In North America, we delivered standout performance with gross written premiums up 10%, reflecting the benefits of strategic investments in product and channel expansion, coupled with significant underwriting platform enhancements. These efforts are continuing to unlock new opportunities in our targeted markets. In global markets, results were strong as we leveraged our lead line product positions and multi-platform solutions, including Lloyd's, while driving a 6% increase in gross written premiums. Key drivers included marine, energy and construction, lines where we have strong margin and a healthy pipeline. In addition, our investments to establish a footprint in the retail lower middle market space are starting to produce attractive results within the U.K. property segment. To complement our profitable growth journey, we have continued investing in innovation, including those that extend beyond technology. For example, we're pleased by the early progress of AXIS Capacity Solutions, otherwise known as ACS. Through ACS, we are tapping into our deep knowledge and experience with third-party capital, bringing innovation to the insurance platform of our company, serving both our open brokerage and delegated businesses. This includes leveraging our underwriting and portfolio management expertise to work in tandem with our strategic partners to develop structured portfolios at scale, while producing new business and underwriting fee income as a new stream to AXIS. While it is early days, several transactions have already been completed. Stepping back and looking at the broader insurance market, we continue to see many micro markets influenced by a risk landscape that is being impacted by a number of dynamics, geopolitical tension, economic uncertainty, war, volatility in climate, energy transition and technological disruption. Against this backdrop, the need for customized insurance solutions is as high as it's ever been. And as a specialist with a diverse product portfolio and robust global platform, AXIS is fit for purpose. As noted, we're seeing varying market conditions across our different lines of business. In liability, overall rates were up 10% in the quarter with 6% growth. In US Excess Casualty, we generated a 13% rate increase and 4% growth. In particular, our wholesale lower middle market segment continues to show favorable margin and sustained positive momentum. Within property, we grew our property book by 12% across our 8 underwriting units worldwide, observing different degrees of competitive pressure. Our growth has been bolstered by our highly premium adequate lower middle market units, both in the U.S. and U.K. as well as by taking advantage of the innovation we brought to the market through ACS. Pete will share more detail about property in his comments. In professional, we grew 19% with a rate environment that's virtually flat. The majority of our growth was generated from transactional liability and our new and expanded E&O lines, which, by way of example, includes Allied Health, miscellaneous E&O and enhancements to our design professional offering. As respect to management liability, we continue to produce solid growth within our private D&O business. Importantly, the areas where we have grown continue to meet our risk-adjusted return expectations. Within cyber, consistent with our prior observations, we are seeing an escalating risk landscape impacted by increasing ransomware attacks and the environment is made worse by the potential of AI enabling more effective and sophisticated ransomware threats. This phenomenon, coupled with increasing from -- competition from MGAs is placing downward pressure on price adequacy. Thus, we will continue to maintain a cautious and selective appetite and do not see cyber as a growth area for the foreseeable future unless a better risk-reward outcome is realized. Moving to our Reinsurance business. AXIS Re has generated positive bottom line results for the last 8 consecutive quarters. This financial consistency has been grounded by a clear underwriting strategy centered around selective profitable growth and strong cycle management. In 2025, AXIS Re produced a strong combined ratio of 92.6%, underwriting income of $128 million. We produced $2.5 billion in gross written premiums, a low single-digit increase over the prior year period, consistent with prior indications. As respects the 1/1 renewals, the market grew increasingly competitive and we held our discipline across our casualty lines for the same reasons we've cited in the past. We maintain a cautious and highly selective stance in professional and liability and our caution has only escalated, reflecting our view of a misalignment of risk and reward. As we progress into 2026, AXIS Re's focus is to continue to deliver bottom line performance. Before I close, I want to take a moment to extend my gratitude to our longtime and long-serving CFO, Pete Vogt, as this will be his last earnings call before he passes the baton to Matt Kirk. On behalf of all of his AXIS colleagues, we're deeply appreciative to Pete for his years of leadership and important contributions to our multiyear transformation program. I, in particular, am indebted to his assistance during my initial transition as CEO of our great company. In summary, 2025 was an outstanding year for AXIS. We are pleased and motivated by the consistent progress and momentum we have achieved. We remain focused on continuing to pursue our specialty leadership ambition while delivering tailored insurance solutions to our customers and producing attractive returns for our shareholders. Finally, I want to extend my appreciation to our AXIS teammates worldwide for their many accomplishments and commitment to excellence. With that, I'll now pass the floor to Pete for his comments. Peter Vogt: Thank you, Vince and good morning, everyone. AXIS had an excellent quarter and a phenomenal full year 2025. For the quarter, our net income available to common shareholders was $282 million or $3.67 per diluted common share. For the full year, $978 million or $12.35 per diluted common share, producing a 17% return on common equity. This drove our book value per diluted common share to $77.20 at December 31, an increase of 18% over the past 12 months and up nearly 24% when adjusted for dividends declared and share repurchases. Our operating income was $250 million or $3.25 per diluted common share for the quarter or just over $1 billion or $12.92 per diluted common share for the full year, resulting in an operating ROE for the year of 18.1%. Let's look at the consolidated company underwriting highlights. Our gross premiums written of $2.2 billion were up 12% over the prior year quarter, driven by accelerating growth initiatives in insurance. On a net basis, premiums were up 13%. For the full year, gross premiums were $9.6 billion, up 7%. Our quarterly combined ratio was an excellent 90.4%, consistent with an outstanding 89.8% for the full year. Cat losses in the quarter were just $30 million, producing a cat loss ratio of 2%. Cat losses were driven largely from Hurricane Melissa, which devastated Jamaica. Our full year cat loss ratio was 2.8%. We're pleased to see the benefits of the strategic actions we have executed over the past few years, reduce the volatile impact of cats to our earnings. We adhere to our philosophy of wanting to see sustained positive signals before releasing reserves. We recorded a release of $30 million with $23 million in insurance and $7 million in reinsurance in the quarter. We remain highly confident in our reserve position. And as is our normal practice at year-end, an independent third-party actuarial firm completed a review of our reserves and this provided us additional confidence in our reserve position. Our consolidated G&A ratio for the quarter, including corporate, was 13.9% versus 13.7% a year ago. The increase is mainly driven by variable compensation and an increase in headcount in insurance as we have added new teams throughout the year. For the year, the ratio was 12.4% versus 12.6% in 2024. We continue to invest in new technology as part of our How We Work program and we expect our new hires and investments to drive growth and efficiency. I'd note that the benefit of our G&A ratio from Bermuda's substance-based tax credits were minimal. I would also note that underwriting fees from ILS partners were $14 million in the quarter and $54 million for the year and represent an attractive stream of fee-like earnings delivered from our ILS partners. Insurance had a strong all-around quarter and year. Fourth quarter gross premiums written were $1.9 billion, an increase of 12% compared to the prior year quarter and $7.2 billion for the full year, up 9%. As Vince detailed in his by line market commentary, we're seeing a wide spectrum of distinct market cycles across insurance products. Our growth has been broad-based across the portfolio as all classes of business grew, except for cyber. We are focused on the profitability and are pleased with the premium adequacy we continue to see across the portfolio. I will note that specifically in property, a significant proportion of the 12% growth came from the build-out of our U.S. and U.K. lower middle market businesses as well as new business associated with ACS partnerships. As Vince noted, our property book is quite diverse across both geography and classes of risk. As we look to 2026, given the current insurance market conditions, we reiterate our confidence that we can grow gross written premiums at a mid- to high single-digit rate while maintaining premium adequacy at our long-term targets. The insurance combined ratio for the quarter and the year were 86.5% and 86.1%, respectively, improved from 91.2% and 89.1% in the year ago periods. We've shown remarkable stability in our ex cat accident year loss ratios. For the quarter and the year, we were 52.5% and 52.4%, respectively, compared to 52.2% and 52.1% in the comparative periods in 2024. This quarter, we saw an uptick in the loss ratio from the effect of rate and trend, which wasn't fully offset by mix. Our insurance expense ratios for the quarter and the year were 33.4% and 31.6%, respectively, versus 32.4% and 31.9% in the comparative periods in 2024. The increase in the quarter is driven by variable compensation for a very successful year in insurance and the investments we've made throughout the year in hiring teams as well as technology and operations. Our investments in operations have significantly reduced submission, quoting and ingestion times, particularly as we employ AI tools and we are still at the early days of implementation. Turning to Reinsurance. Gross premiums were up 13% in the quarter. I would stress that 4Q is seasonally our smallest quarter with only about 10% of the annual GWP generated in the fourth quarter. This quarter, a significant part of the growth was driven by a single large quota share U.K. motor transaction, which is renewable in Q1 2027 and therefore, will not repeat in 4Q 2026. We also saw new business and favorable adjustments in the credit and surety line of business. Full year gross premiums were up 3% and a better characterization of the year's trend. The reinsurance combined ratio was 93.9% in the quarter with an ex cat accident year loss ratio of 68%, with no cats and a 1.9% benefit from reserve releases. For the full year, combined ratio was 92.6% with an ex cat accident year loss ratio of 68.1%, including 0.2 point for cats and 1.5 point benefit from reserve releases. The quarter's and year's acquisition ratios were 23.1% and 22.2%, respectively, up from 21.8% and 22% in 2024, reflecting business mix changes. The increase in the G&A ratio for the quarter, up 4.7% from 4.0% a year ago, largely reflected higher variable compensation accruals. For the full year, the ratio was 3.6%, flat versus 2024. Building upon Vince's comments about the January 1 renewals, we held true to our strategy of a bottom line focus with an emphasis on premium adequacy. We kept a cautious stance in reinsurance liability and professional lines. If we continue to see a challenging reinsurance market as we progress through 2026, we will remain bottom line focused. Our overall reinsurance gross premiums could be down in 2026, even up to double digits. However, while the volume may be reduced, we remain confident in the portfolio's expected underwriting profitability. We had a strong quarter and year for investment income. In the quarter, investment income was $187 million and for the full year, investment income was $767 million, up 1% over the prior year. This despite the impact of the LPT transaction, which closed in April. With increasing stability in our underwriting results, we have moved up marginally in our investment risk appetite with a slightly increased exposure to below BBB- rated bonds at year-end. We are now at the high end of our stated range of 15% to 20% of the portfolio designated for higher risk at 19%. Our effective tax rate in the quarter was 14% and included a $19 million nonoperating income benefit arising from an increase in our Bermuda ETA that was required due to an amendment to the Bermuda Corporate Income Tax Act. We expect an ongoing overall effective tax rate in the 19% to 20% range. We are in a very strong capital position, which enabled us to return substantial capital to shareholders this year through $139 million of dividends and $888 million of share repurchases. And we have a current authorization for another $112 million of share repurchases. I would highlight that our priority for capital is to fund organic growth opportunities, which are accelerating in our specialty insurance business. I wanted to take a moment to acknowledge that this will be my last earnings call for AXIS. The company has gone through a lot of changes over the years and I'm pleased to be able to step back when the company is better positioned than it has ever been before, both operationally and financially. It has been a privilege to represent my AXIS colleagues to the public markets over the years and I'm confident that Matt and the rest of the AXIS finance team will continue to serve you all well. Thank you and we'd be happy to take your questions. Operator: [Operator Instructions] The first question comes from Andrew Kligerman with TD Cowen. Andrew Kligerman: Pete, great run. Congrats. And I guess the first question I'd like to touch on is the expense ratio. And so the underwriting-related general and administrative expense ratio came in for the year at 12.4%. And make sure I'm right, please. I think the goal for 2026 would be 11%. So that's 140 basis points down. So that's the part A of it. And the part B of it is, the overall expense ratio consolidated was 34.2%, where does that go over time as well? Peter Vogt: So thanks, Andrew. Thanks for your opening comment, too. This is Pete. I'll take that. And I'll break it into the 2 pieces when we think about it. The G&A ratio for the year and the quarter were impacted by variable compensation. And if I normalize and I think that's a good way to look at it, for the year, the G&A ratio -- underwriting G&A would be 11.6%. And so there was a top-up there for variable comp. And in the quarter, it would have been 11.2%. I'd say both those metrics were on our glide path on our path to 11% as we were planning it from 2024 to '25 to '26. And I'd even say that we spent more money, as Vince indicated, in our IT and operations, getting more efficient in '25 by accelerating some spending there than we even thought we were going to do when we set our targets all the way back to the Investor Day in 2024. So we feel good about our glide path into 2026 and we're holding to our commitment of an 11% G&A ratio as we go into 2026. But I would say we'll always do everything in the best interest of the shareholder and we look forward to actually being able to deliver on that promise. But that is the glide path we're going on. We feel really, really good about where we are and we feel good going into 2026. I don't know, Vince, if you want to add your thoughts. Vincent Tizzio: I would. Thank you, Peter. I think the other important point that perhaps adds the how to Pete's comments is that we expect in the '26 year to realize the leverage of the various investments that we've made, Andrew. You'll recall that we mentioned in the third quarter, we had accelerated our investments in technology in all facets and forms. We hired a number of teams. We reasonably expect in the operating year of 2026 to start to monetize those investments in efficiency, productivity and rationalized expenses in our operating model. There's a variety of shapes and forms that, that will show itself over the coming quarters. But we remain optimistic as we head toward end of 2026 and representing the goal that we had talked to accounting for, of course, normalized incentive compensation. Andrew Kligerman: That was super helpful. And maybe shifting over to kind of the sustainability of margins as you grow. I mean, 12% net written constant currency on consolidated was really strong. And I think I heard mid- to high single-digit growth outlook for insurance and potentially even down double digit in reinsurance. So as you do this, do you feel comfortable with what was an accident year combined ratio ex cats consolidated of 88.6% for the year and 90.4% for the quarter? Do those numbers feel very sustainable? Do you do closer to the 90.4% or closer to the 88.6% that was for the full year? How should we kind of think about those combines on a consolidated basis? Peter Vogt: So Andrew, this is Pete. I'll take that first. As we think about where we are in the quarter and then leading off into 2026, when we think about the various pieces, as I mentioned, we already talked about the G&A ratio. So I'll let that conversation go but we feel really good about where we're going there. When we think about the cat loss ratios, as I've mentioned on the cat side, we really do expect full year cats to be in the 4% to 5% range. And so really good year for us in cats this year, really good, us handling the volatility that was out there. But I think a normalized year would kind of be in that range. And then when we think about the attritional, we've been actually very much able, especially on the insurance side, as we've talked about, there's been some pressure on the attritional due to rate and trend but we've been able to offset that by mix and we've been able to do that all through 2025. As we go into '26, I think there'll be some more pressure on rate and trend that we may not be able to completely offset by mix as we go into 2026. And that would be the one area where we see some pressure. But again, I look at the all-in combined where if we see some uptick in the attritional loss ratio, as we talked about, we're working on bringing the G&A ratio down. And so all-in combined, around that 90% target is a pretty good number for the overall company. And Vince, do you want to come in over the top? Vincent Tizzio: I think you're right, Pete. And I think you broke out the component parts of how we get there. But we entered the year feeling very good about the portfolio in terms of the start point of premium adequacy. As Pete indicated in his prepared remarks, we acknowledge some of the intersection of rate trend and mix. We've done a really superb job at redesigning the underwriting portfolio. We're entering the year here '26 with continued discipline around our cost structure. I mentioned in your prior question, some of what will be revealing itself through the investments that we accelerated in the prior year. We've done a really good job in managing our catastrophe exposure. But I think ultimately, the range that Pete just expressed is in keeping with our own expectations. Andrew Kligerman: That was great. If I could sneak one last quick one in. The reserves, you talked about favorable -- you talked about favorable development of $23 million in insurance, $7 million in reinsurance. Anything you would break out on casualty that was unusual? And with Matt, I don't know if Matt is on the call but Pete has consistently expressed confidence in the reserves. I'm curious if, Pete, you're going out feeling still confident and Matt, how you felt as you looked at the reserves coming in? Vincent Tizzio: Andrew, it's Vince starting off. First, we feel very good about our reserve position for the company. Secondly, in the quarter, we followed the same philosophy that we articulated since our reserve charge. So there's no change in our philosophy of how we manage our reserve position. As it relates to the source of where it came, it did not come from long-tail lines, as you know. And I'll transfer to Pete now. Peter Vogt: Yes. Thanks, Andrew. I guess what I would say is, again, the reserve releases really did come from short-tail lines. You'll see it from property and on the insurance side as well as Credit & Surety and then a little bit from agriculture, Credit & Surety and A&H on the reinsurance side. And overall, I'd say when we think about the long-tail lines, there's always some little puts and takes across the accident years and we'll see that when we have the triangles in the 10-K. However, there was nothing significant or material that would give us any cause for concern. If there was, we would have taken some action. So we feel good about all that. And to your first question to me, as I sit here at the end and I look at the balance sheet, I feel very confident and feel good about leaving the company in the great hands of Vince and Matt and the rest of the management team and where the balance sheet stands, both from a capital position and a reserve position. And with that, I'll pass it to Matt. Matthew Kirk: Great to be here and speak to you all. I would just reiterate, I've been here for 3 months in a very well-planned out transition plan. Much of that time has been spent working with the reserving team, working with Pete. And overall, I'm quite comfortable with where the reserving is at right now. And I agree with what Pete said, we have a strong balance sheet and a strong capital position. Operator: The next question comes from Yaron Kinar with Mizuho. Yaron Kinar: And before my questions, Pete, just want to wish you well as you embark into retirement. I guess going back to the expense ratio. So I understand this quarter, part of the increase in the expense ratio is variable comp, which I think was also true elsewhere in the year. But -- and obviously, it's a good problem to have because you have strong performance. But as you expect to build momentum, isn't that going to remain a headwind in the future in '26 and beyond? Peter Vogt: Yes. As we think about going forward, the annual targets that we use are reflective of what we think the environment is, Yaron. So this year, we had a great year across a number of dimensions. But as we look forward, we're constantly adjusting our annual plans and that moves our targets a bit. So I do hope it will always be a headwind. And I think as a headwind, if we have some variable comp because we've performed tremendously great for the shareholders in a particular 12-month period, if we have to put up some variable comp due to that, if we go above 11% because that's the reason, I think that would be, I'll call it, agreeable to the shareholders given that it would be good financial performance that they'd be receiving. Vincent Tizzio: And Yaron, this is Vince. Welcome back. It's good to hear your voice. Please don't underestimate the leverage that I pointed to in Andrew's question inside the operating model. The number of persons that will be required to execute our financial plan, the increased productivity from the resources and the numerous teams that we brought into the organization, the reshaping of our general cost structure that extend beyond personnel costs, the increased fee income that's resulting from our various sources of underwriting fee income, both in our reinsurance and more recent in our insurance business, the mix shift that has dramatically taken fold with respect to the insurance versus reinsurance contribution and the continued portfolio reshaping going on in that business. Will it be an earnest effort? Everything has been earnest at AXIS. We've been leading quite a bit of a transformation. We're focused on the objective that we set forth. If we ever course correct, we'll certainly announce you but we are focused on our 11% in the manner that we described. And we feel very good, again, about the ability to monetize the numerous investments that we took in our operating platform, which has had a bearing certainly in our GA ratio in the reported results of year-end 2025. Yaron Kinar: And thanks for the welcome. It's good to be back. Just to confirm, though, on the expense ratio, we are also seeing, I think, a lot of talent movement right now and I think there's also maybe a bit of an increase in what talent is being paid right now. I just want to confirm, if you see the opportunity to grow in a geography or a line by investing more in personnel, you'd be willing to jump on that even if it means that the 11% target may be delayed by a bit even with the leverage and the other efficiencies that you mentioned? Vincent Tizzio: Yes. Yaron Kinar: Okay. And one final quick one. The combined ratio, Pete, you said that you still feel comfortable with the 90%. That is reported, right, not underlying? Peter Vogt: Yes. That -- so you look at the fourth quarter at 90.4%. As we look going forward into 2026, somewhere in that range is what we would expect given the puts and takes that we'll have as we go into the year but still comfortable in that range. Operator: The next question comes from Christian Trost with Wells Fargo. Christian Trost: Going to the high single digit -- mid- to high single-digit growth guide for insurance, can you maybe just give a little bit more color on the path to getting there, just given -- maybe you could provide some assumptions on the rate environment as well as the expected growth uplift from some of your new and improved product offerings? And then just sticking with that, any early insights into how the RAC Re vehicle is performing? And did that have any growth impact in the quarter? Vincent Tizzio: Christian, I'll start out and then Pete will come over the top. So as I mentioned in the third quarter, our insurance business enters 2026 without any material reshaping going on. Obviously, as a specialist, we'll always have pruning. Additionally, we indicated that we entered this year with a premium adequate portfolio. We have further leaned into our new and expanded lines, which we've been talking about now for the last couple of quarters and continued to realize material inroads. In fact, if you were to look at the growth in our insurance segment in the fourth quarter discrete, about $150-odd million of our growth came from the new and expanded classes. We view these classes in the aggregate as premium adequate. And what they've done for AXIS is create new revenue streams in terms of products, forms of distribution and customer segmentation. We have optimism around the runway that exists to continue executing the growth that we have produced in keeping with the range of estimate that Pete mentioned. As it relates to ACS, Pete, I'll ask that you come over the top in terms of the contribution but it was not a substantial volume contributor in the fourth quarter. Peter Vogt: Yes. Overall, ACS, this was the first quarter we booked any gross written premiums to ACS in the quarter. It came in just around $20 million for insurance, very little net earned in the quarter, quite frankly, because it's going to earn over a long period of time. So it's just getting started. And again, we expect, as we've talked about in the last call, when you think about the RAC Re deal, you'll see most of the written come in over '26 and '27 and '28 because of the way that deal is structured. And again, the net earned is going to come in over '26, '27, '28 and '29 because of how that's going to earn. So it's a really good deal. We're excited about it and it's just started in this fourth quarter. Christian Trost: Got it. And then for my follow-up, just switching to the paid and incurred trends. They were a bit better sequentially and they did improve year-over-year when you adjust for cats. But it is still a bit elevated in the low 90s. And I know previously, you pointed out business mix. But can you maybe provide some more color of like what we should expect to see going forward as we continue to see that mix shift and any other drivers that could potentially improve those metrics? Vincent Tizzio: Christian, consistent with what we've indicated in the past, we've had -- as a company in the midst of a underwriting transformation, there has been a substantial set of changes related to both what you pointed out on the mix. Our claims organization has had substantial investment in resources, capabilities. We've had some acceleration with respect to large payment claims. We look at this indication really in combination with many other factors. In and of itself, it's really not dispositive of anything that is alarming to us. We feel very good confidence around our reserve position. We did have, as you indicated, a decrease in the outcome of that ratio. And even if you were to compare the prior year same quarter discrete, it's explainable by catastrophe losses. In 4Q 2024, we paid out, I believe, $80-odd million. And so you see the material difference here in 4Q 2025. And so we are attentive to this issue. We are not dismissive about it. We place it in a broader context. And from our judgment, we're pleased with how we're managing the overall outcome of our underwriting results. The resolve we have in our reserve position and the continued integration of our underwriting model that takes together the insights of our claims organization, our actuarial function and underwriting, making certain that we are as observant to our bottom line aspiration as possible. Christian Trost: Got it. And if I could just sneak one more. On the G&A, is it safe to assume -- I mean, obviously, it sounds like you will do opportunistic hiring if it arises. But is it safe to assume that we should have a more normalized, I guess, hiring pattern in '26 versus '25 because it sounds like there was a lot of upfront investments on some of these new underwriting teams. Is that a safe assumption? Vincent Tizzio: I think we want to reserve the right to remain very strategic in how we go about hiring teams. We have some scheduled for the 2026 year. I don't really want to reveal how many or in what lines of business. But suffice to say, my business leaders are certainly active. AXIS' brand is sought after and we're going to use great discretion in making certain that we can optimize the productivity, enhance the alignment to our distribution strategy that has worked substantially well for our organization and make certain that it's aligned to our overall underwriting strategy. Operator: The next question comes from Meyer Shields with KBW. Jing Li: This is Jing, on for Meyer. My first question is on growth. You've mentioned like low middle market growth throughout the 2025, which significantly contribute to the property growth in for Q2. Can you add more details of what's driving the sustained momentum? And also, could you update us on the competitive landscape there? Vincent Tizzio: Yes. The lower middle market continues to be, for AXIS, a dedicated and new customer segment that we've been pursuing for the last couple of years. Kindly recall that we brought in chief, most of our product set from our wholesale division, including our professional liability classes. We've been executing a strategy that has been both wholesale and retail distribution sourced. We're pleased with the continued proposition development that our North American team has created, bringing customized solutions to this customer segment that has varied meaning in definition but in the aggregate is really a transaction risk profile, a lower complex risk profile. We're pleased with the sustained growth. The runway remains fairly long. And the competition, of course, it exists. This is a known customer segment that has good margin. It has the potential to be sticky. But we're pleased with the -- what the channel that we're going through, the partnerships that we have formed, the product design. And finally and critically importantly, the investments that we've taken in technology to enable a heightened pace of straight-through processing, enhanced quoting productivity, both by individuals. And therefore, in the aggregate, we're pleased with the momentum and we do not see any reason why we cannot sustain the growth in this segment. And the submission volume in this area of our company is just substantial. Jing Li: That's very helpful. My second question will be on the core loss ratio. I know you mentioned the pickup because rate and trend isn't fully aligned. Could you like unpack where you're seeing the loss trends running ahead of pricing? Peter Vogt: I would say -- yes, this is Pete. I'll come in and I'll ask Vince to then come over the top. But I'd say where we're seeing probably the most significant pricing would be in some of our property books, where E&S Property and Global Property specifically in London, we've had some -- that's where their pricing pressure is probably most acute. I'd say one thing we're really happy about would be, on the long-tail lines, we continue to see rate in excess of trends. That's given us some confidence in there. And I think that's why Vince is currently and always characterize the current market as kind of a changing market, not necessarily a soft market because of the different puts and takes. Vincent Tizzio: Yes, Pete, I think that that's right. We continue to have strong observation, management control over the long-tail lines where we have acute watchfulness around trend. We continue to leverage our short-tail versus long-tail portfolio composition, which has obviously different trend assumptions. We have a vigilant accounting of trend quarterly with our actuaries, our claims organization, our underwriting organization. And as you know, over the last several years, this portfolio has shifted increasingly toward our short-tail lines. And finally, within the new and expanded classes, you'll recall, we estimated some 60-odd percent of our new and expanded classes were coming from the short-tail lines. And so that's how we would respond to you. Thank you for your question. Operator: The next question comes from Josh Shanker with BoA. Joshua Shanker: Circle to the Pete bandwagon. You're a real one man, so I appreciate it. Thank you. Peter Vogt: Thank you, Josh. Joshua Shanker: All right. So tough question time. Third-party underwriting or outside underwriting from partners, how big do you expect it to get as a percent of the whole in 2026? If -- and you can go wherever you want but in terms of the way you segment the business now by class, what percentages will see the biggest surge or I should say, biggest percentage coming from third-party underwriters? And if you could compare the expense and acquisition ratios of third-party business versus in-house business, that would be wonderful. Vincent Tizzio: Josh, let me try and unpack your question, your use of third-party underwriting. Okay. So with respect to what we call delegated, let me provide some context and I'll try and address each of the elements of your question directly and hopefully responsively. So firstly, at the end of 2025, delegated across our insurance platform represent approximately 32% of the volume of what we produced in the company. Importantly, there are 4 delegated relationships that have substantial contribution to that 32%. We've spoken about these areas in prior calls. They involve, of course, our pet delegated relationship, our surety delegated relationship, our transactional liability book, which is an increasing focus, of course, in this changing risk landscape. And finally, our Portfolio Solutions group out of London, where we are a so-called smart follow market and you know the lexicon in London, that is a term of our. Third, with respect to the difference in acquisition costs, I can tell you that they're contemplated in our overall estimates. They're approximately -- it's difficult because of the profit-sharing agreements to give it a fine point. I'll ask Pete to help me on that. And then finally, in terms of sizing, I don't think that the delegated book will become smaller for AXIS. I think staying in the 30-odd range. Please note in the North American component, it is only 14% of our total volume in distribution delegated. And as you would reasonably expect from a London, Lloyd's market, we have a substantial percentage of our business coming from a variety of forms of delegated. Hopefully, that answers your question. Joshua Shanker: Nothing short of an excellent answer. And in terms of looking forward into '26, '27, '28 and beyond, are you thinking the industry is changing in a way that delegated underwriting is going to be an increasingly large proportion of the portfolio? Or is this a soft market strategy that will invert in 2029 when the markets change? Vincent Tizzio: If I have this approximately right, it would be great. But look, instinctively, there is structural change that has gone on in the delegated space. And in particular, if you look at the order of investment that has been made within our strongest set of partnerships, U.S. wholesale distribution, a considerable investment has been made in the MGU entities within those organizations. I think that has staying power. I do think that there'll be a consolidation of lines of business changes that will emerge. I can't be perfectly prescriptive about which lines of business-driven MGAs are going to fold. I would point to -- the environment that we're competing in is quite different than 3 years ago with respect to margin. And the underwriting acumen that has to be shown by these entities will be critically under examinations, I think, particularly those that are private equity owned. I do think in contrast, the wholesale dedicated MGUs have staying power. As you'll recall, Josh, when Pete and I executed the reserve charge, we redefined the role and purpose of MGAs and delegated authority inside our organization. It was a painful set of lessons that we had to take. We're very pleased with what Mike and Sarah have done in executing the change in our underwriting strategy. We're more concerned about the controls that we have in place, which has resulted from substantial investment in data and analytics. And more importantly, the economic alignment of interest that we've created through the profit sharing agreements and where we -- RAC Re, in particular, if you just go back to the notes that we conveyed, it shows convincingly how we have changed the dynamic of how we interact in the MGU arena. I'll leave it there. If there's any further questions, we're happy to take it. Operator: The next question comes from Andrew Andersen with Jefferies. Andrew Andersen: Pete, I think last quarter, you were saying within the Insurance segment, RAC Re could push growth into double digits but now you're kind of pointing to mid- to high single digits. So is there kind of a change in expectation on either organic growth or on RAC Re into next year? Peter Vogt: You know what, Andy, I am very consistent with what I said in the third quarter. Yes. I think Vince came in over the top of there. But mid- to high single digits would be excluding RAC Re as we look at 2026. RAC Re, given what our expectations are, could push -- would push the insurance into the double digits. Andrew Andersen: Okay. And then on reinsurance, kind of pointing to the potential for double-digit down, I suppose, on a gross basis. I do think maybe half of that segment, 40% to 50% is what could be short tail or specialty lines. Is that kind of more of a flattish expectation there? Or could we break apart the casualty and specialty within reinsurance, how you're thinking about that? Vincent Tizzio: This is Vince. I think if you want to talk about the portfolio construct, you should reasonably expect in the long-tail lines for us to continue the reshaping that we've been talking about these past couple of years. A continued focus within our specialty lines. There's a variety of makeup between and among our definition of specialty reinsurance lines as respects short tail or longer tail but not long tail. But the bumper sticker that I hope you take is, while volume may be less than year-end 2025, we feel very good about the margin contribution of underwriting profitability that will be generated from our reinsurance business. And we continue to see a substantial alignment between the reward of our distribution partners and the capability set of our specialist reinsurance teammates. And so I'll leave it there. Operator: The next question comes from Charlie Lederer with BMO. Charles Lederer: Congrats, Pete and best of luck to you. Look forward to getting to work with you, Matt. Maybe just going back to Christian's question on the attritional loss ratio in insurance. Appreciate the new and expanded classes are rate adequate. I guess when we think about the increasing contribution from professional liability and the rate subsiding in property, can you just talk about how that mix shift should impact the attritional loss ratio in those 2 lines -- from those 2 lines as we progress through '26? Vincent Tizzio: Look, I don't know if I'll answer it in the lens that you raised it. But I'll give you, I think, a more helpful answer to the broader part that I take from your question. Firstly, the growth in professional was substantially driven by transactional liability and our new and expanded E&O classes with some complement of contribution from our design professional business. Second, we've constructed a portfolio that has leveraged, of course, a lot of growth expectancy from the new and expanded. And if you look at the last couple of quarters, you'd certainly have a consistent proof point. We've introduced a capability in the form of AXIS Capacity Solutions that is really addressing unique needs from our customers and utilizing third-party capital. When you put in context Pete's remarks, around the headwinds, obviously, the pressure on our ex cat attritional ratio -- ex cat attritional -- that's a tongue twister, excuse me, ex cat attritional loss ratio, will be shown in the '26 year. We don't think it's in an outsized manner. If it's about 1 point, that would be in keeping with what I would reasonably expect with the information we have today but it's certainly not something that's going to materially move. The influence of a short-tail portfolio, a balanced approach in our long-tail lines gives us confidence in the overall outcome of our loss ratio performance. Pete, I don't know if you want to come over the top on anything else. Peter Vogt: Yes. I think you kind of hit it there, Vince. We've had actually a real benefit of mix change this year. As we go into next year, depending upon where the markets go, we may not get the exact same benefits that we've been getting on mix. And so we do think that -- I think Vince said it right, somewhere around 1 point would be an expectation on the insurance side. Charles Lederer: And you mentioned the prioritization of organic growth over buybacks in your prepared remarks. Obviously, I appreciate that buybacks were a little bit elevated this year. Just wondering, I guess, if you get an average cat year and you hit your top line targets, how we should think about the capital return profile for AXIS just given the mix shift and the evolution? Peter Vogt: Yes. This is Pete, Andy. Again, we're going to continue to be opportunistic with the share buyback. We do still believe at our current market price, we're undervalued. And so we did a fair amount of share buyback in the fourth quarter. But our #1, as we said in our prepared remarks, is organic growth. And with the opportunities we have in front of us, with who we've been dealing on, we think we'll have good opportunities for growth in this year in our insurance specialty side. And then based upon the earnings profile that we have, we'll look to put capital to use, still continuing to build out our data and analytics and our platforms. But then we'll look to share buyback in an opportunistic manner. I wouldn't give it a specific number per quarter or anything like that. Operator: The next question comes from Rowland Mayer with RBC Capital Markets. Rowland Mayor: I wanted to quickly ask on the reinsurance growth. I assume that the down up to 10% or up -- down double digits includes the motor renewal. And am I thinking about it correctly that, that effectively renewed twice in 2025? Peter Vogt: It did not renew twice in 2025. So it's a good question. It was a brand-new product really that we did in the fourth quarter. It just happens to be, I'll call it, a 15-month product. And so it's going to come up for renewal in the first quarter of '27. That does have a bit of an impact because it was a large quota share. But I think our comments are more around our feeling about where the current market is in the long-tail lines, the casualty lines, especially in reinsurance and how we're seeing the market dynamics play out there. I don't know, Vince, if you want to add anything else? Vincent Tizzio: I think you answered it. Correct? Rowland Mayor: Yes. And then I guess on the next one, going back to Charlie's question on the buyback. 2025 was just -- it was very lumpy with all the Stone Point deals. Is the right way to think about it, it should be a bit smoother next year? And I mean the payout ratio this year was 100%. I assume it -- that won't happen again. There was some elevation because of just the Stone Point opportunity. Peter Vogt: Yes. This is Pete. I'll come in over the top on that. One of the things that did elevate the payout ratio in the year was remember, we did the Enstar LPT transaction, which actually gave us a real benefit to our capital position in the year and allowed us to do what I would call more share buyback as a percent of income than we would normally see in a normal year. I would say it was a bit lumpy in 2025. Again, that was the opportunistic nature of our share buyback. So I still would say that we're going to be opportunistic through '26. Could be lumpy depending upon what we see happening in the markets as well as our needs for growth. Operator: There is a follow-up question from Yaron Kinar with Mizuho. Yaron Kinar: Back for more. Just maybe pounding a little more on this capital deployment issue. Your premium surplus is still below 1. You are growing but with the growth targets you're offering and the lines of business in which you're growing, which I think are probably a bit more capital light, you've moved away from cat exposures. Like why -- is it reasonable to think of the payout ratio sustaining above, call it, the 60% range even when you're growing? Peter Vogt: Yaron, this is Pete. I would say if you're looking at a payout ratio that high and that would be including what is a very good common dividend. I would say that looks -- sounds a bit high side to me. So I would actually -- if you're thinking about modeling, I would be modeling below that number. Vincent Tizzio: Yes. And I think the assumption on some of the capital use in certain of our specialty lines is perhaps larger than, Yaron... Peter Vogt: Larger than you think. Yes. Vincent Tizzio: Is accounting for but I think that's an important point. We can talk further about it but. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Vince Tizzio, CEO, for any closing remarks. Vincent Tizzio: Thank you for joining today's call. As we look to the future, we believe AXIS is very well positioned in the marketplace and poised to continue to build on its positive momentum. We look forward to updating you on our continued progress in future quarters. Thank you very much. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2026 Real Matters Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Lyne Beauregard, Vice President, Investor Relations and Corporate Communications. Please go ahead. Lyne Fisher: Thank you, operator, and good morning, everyone. Welcome to Real Matters financial results conference call for the first quarter ended December 31, 2025. With me today are Real Matters' Chief Executive Officer, Brian Lang; and Chief Financial Officer, Rodrigo Pinto. This morning, before market opened, we issued a news release announcing our results for the 3 months ended December 31, 2025. The release, accompanying slide presentation as well as financial statements and MD&A are posted in the financial section of our website at realmatters.com. During the call, we may make certain forward-looking statements, which reflect the current expectations of management with respect to our business and the industry in which we operate. However, there are a number of risks, uncertainties and other factors that could cause our results to differ materially from expectations. Please see the slide entitled cautionary note regarding forward-looking information in the accompanying slide presentation for more details. You can also find additional information about these risks in the Risk Factors section of the company's annual information form for the year ended September 30, 2025, which is available on SEDAR+ and in the Financial section of our website. As a reminder, we refer to non-GAAP measures in our slide presentation, including net revenue, net revenue margins, adjusted net income or loss, adjusted net income or loss per diluted share, adjusted EBITDA and adjusted EBITDA margin. Non-GAAP measures are described in our MD&A for the 3 months ended December 31, 2025, where you will also find a reconciliation to the nearest IFRS measures. With that, I'll turn the call over to Brian. Brian Lang: Thank you, Lyne. Good morning, everyone, and thank you for joining us on the call today. Fiscal 2026 is off to a good start with double-digit top line growth headlining our performance in the first quarter. We also launched 8 new clients in the first quarter, including 2 top 100 lenders, and we added a new channel with a Tier 1 lender in U.S. Title. Consolidated revenues were up 14% and net revenue increased 19% year-over-year, reflecting gains across all 3 segments. The company achieved positive consolidated adjusted EBITDA of $0.1 million for the quarter, driven by strong operating leverage in U.S. Appraisal and U.S. Title. Despite the first quarter typically being seasonally slow, the successful onboarding of new clients and expansion of market share, supported by favorable conditions in the refinance market contributed to a positive bottom line. Notably, this is the first time since Q1 2022 that profitability was achieved in the first quarter despite current market volumes being approximately 70% lower than at that time, demonstrating the impact of our market share gains combined with improved efficiencies in the business. It also reinforces that our model can generate significant operating leverage even under these market conditions. In U.S. Appraisal, we maintained leading positions on lender scorecards, which contributed to gaining additional market share sequentially with 2 large clients. Furthermore, the segment demonstrated strong operating leverage as reduced operating costs, combined with a 7% increase in net revenue, drove 36% year-over-year growth in adjusted EBITDA. Refinance origination volumes in our U.S. Title segment more than doubled as a result of new client wins, market share growth and to a lesser extent, mortgage market tailwinds. With increased volumes, net revenue for the U.S. Title segment increased by 110%. The vast majority of that net revenue gain contributed directly to our bottom line, bringing us closer to achieving breakeven results in this segment. Even with the recent increase in our title volume run rate, we still have the capacity to almost double our volumes with the existing cost base outside of variable cost increases. In other words, a high proportion of each incremental dollar of our revenue we will generate in the title segment will continue to flow directly to EBITDA as we continue to scale up the Title business. With the potential mortgage market recovery on the horizon, more lenders are turning their attention toward capacity planning, which includes ensuring they have the right partners to deliver leading performance when volumes ramp up. Our sales team is capitalizing on this trend and our network management model's ability to deliver performance at scale to drive more RFP conversations and accelerate the momentum in our U.S. Title sales pipeline. Turning to Canada. The business launched 3 new clients in the first quarter, and we delivered modest revenue and net revenue growth despite a decline in mortgage market volumes and lower insurance inspection revenues. With that, I'll hand it over to Rodrigo. Rodrigo? Rodrigo Pinto: Thank you, Brian, and good morning, everyone. In fiscal Q1, the average 30-year fixed mortgage rate fell from approximately 6.43% in early October to 6.32% at the end of December, largely due to tighter spreads. From October to December, 10-year U.S. treasury yields rose slightly from 4.1% to about 4.15%. Meanwhile, the gap between 30-year mortgage rates and 10-year treasury yields narrowed by around 20 basis points, finishing the quarter at roughly 200 basis points. This shift indicates that risk premiums in the housing financing market are continuing to ease, showing clear progress towards the long-term historical average spread of 170 basis points. The modest decrease in rates over the quarter prompted growth in refinance market originations, although from a low base. Meanwhile, purchase market origination volume experienced a slightly decline, consistent with projections from MBA and Fannie Mae. We continue to be committed to managing areas within our control, such as scaling operations in response to volume changes and maintaining disciplined expenses practices. As we consistently stated, our priority is to expand our client base and market share by enhancing operating efficiency, driving leverage and margin growth and keeping our balance sheet robust. Turning to our first quarter financial performance. I'll start with our U.S. Appraisal segment where we recorded revenues of $32.9 million, up 12% from the same period last year. Revenues from purchase mortgage originations declined modestly. However, revenues from refinance mortgage originations increased by 27% due to higher addressable mortgage origination volume from refinance transactions. The comparable quarter also included higher purchase and refinance volumes from a temporary reallocation of market share from one of our leading clients, which will no longer impact comparable results after this quarter. Home equity revenues were up 22% year-over-year and accounted for 26% of the segment's revenue. U.S. Appraisal net revenue was $8.4 million for the first quarter compared with $7.8 million in Q1 '25, and net revenue margins decreased by 110 basis points, mostly due to the distribution of transactions volumes as it relates to geographies, clients and product mix. First quarter U.S. Appraisal operating expenses decreased by 5% year-over-year to $5.1 million. We posted U.S. Appraisal adjusted EBITDA of $3.3 million, up 36% from the first quarter of fiscal 2025, and adjusted EBITDA margins increased by 820 basis points to 39.1% compared with the first quarter last year as we benefited from strong operating leverage. Turning to our U.S. Title segment. First quarter revenues increased 76% year-over-year to $4.4 million and refinance origination revenues were up 135%, principally due to market share gains with existing and new clients and higher refinance mortgage origination volume. U.S. Title net revenue was $2.8 million, up 110% from the first quarter last year, and net revenue margins increased to 63.9% from 53.4% due to higher refinance origination volumes. Given the order flow of volumes in Q2, we currently expect net revenue margins to trend closer to the lower end of our target operating model range in the second quarter. U.S. Title operating expenses were up 16% year-over-year, primarily due to additional hires to accelerate the deployment of new title clients, and we recorded an adjusted EBITDA loss of $0.8 million for the U.S. Title segment compared with the loss of $1.8 million we posted in the first quarter of fiscal 2025. If we excluded the investments we made in our title sales capabilities, approximately 85% of the incremental net revenue we recorded in the quarter would have flowed to the bottom line. In Canada, first quarter revenues increased modestly to $9.2 million from $9.1 million in the prior year due to net market share gains with new and existing clients for appraisal, which were partially offset by lower mortgage market volumes and lower insurance inspection services. Net revenue was up 3% to $1.8 million and adjusted EBITDA was flat at $1.1 million. In total, first quarter consolidated revenue and net revenue were up 14% and 19% year-over-year, respectively, principally driven by the growth in our U.S. Appraisal and U.S. Title segments. We recorded consolidated adjusted EBITDA of $0.1 million, up from a loss of $1.7 million in the first quarter of 2025. We ended the year with a very strong balance sheet with no debt and cash of $43.8 million at December 31, 2025. The increase in our cash balance from the prior quarter was mainly due to the timing of collections and changes in working capital, which normalized from the fourth quarter. With that, I'll turn it back over to Brian. Brian? Brian Lang: Thank you, Rodrigo. Our first quarter results marked a strong beginning to the fiscal year. We achieved double-digit top line growth and demonstrated effective operating leverage, resulting in positive adjusted EBITDA during a period that is typically a seasonal low for our business. Additionally, we successfully onboarded new clients, expanded into an additional channel and consistently ranked highly on lender scorecards. Our performance in Q1 illustrates that our business model is well positioned to achieve substantial operating leverage as we scale. Higher transaction volumes on our platform have the potential to meaningfully enhance both margins and profitability. Looking ahead, we remain cautiously optimistic about improving fundamentals in the U.S. mortgage market. Today, there are 13 million mortgages with interest rates above 6%. In fact, there are now more mortgages with rates above 6% than below 3%. That means that we are seeing a rebalancing of the interest rates on outstanding mortgage debt, which is indicative of a shift toward a more normalized distribution of the market. This dynamic gives us confidence that there is a substantial pool of refinance candidates, which could become a significant tailwind for volume growth in the years ahead. Our strategy of adding clients and growing market share through better performance remains on track, positioning our business for scale and the achievement of our target operating model. With that, operator, we'd like to open it up for questions now. Operator: [Operator Instructions] Our first question comes from Stephen Machielsen with BMO Capital Markets. Stephen Machielsen: I was wondering if you could give us a bit of color into the cadence of refi activity through the quarter just as the rates declined. Like did you see a lot of demand front-loaded? And how has demand progressed into Q2? Brian Lang: Great. Thanks for the question, Stephen. So -- and it's a good question. We had another what we would call months boomlet in September and October heading into Q1. So there was definitely a benefit that we saw. We would have actualized a chunk of the September volume on appraisal in the previous quarter, but definitely on title, we benefited because of the time lag to realizing revenue. So refi volumes were solid in the quarter, as I say, a little bit stronger in the front end than the back end. But we're definitely seeing and if you look at the industry MBA and Fannie results, they're going to look to a decent growth in refi in the quarter. On the flip side, purchases definitely struggled. So purchase has definitely been a little bit more of a challenge in the market, but we definitely had some refi tailwinds. When we look at our results, though, Stephen, if we take a look at the title results, 2/3 of that came from -- for us, the growth, 2/3 of that came from the Tier 1 launch that we had. Q1 was the first quarter that we realized the full revenue from that Tier 1. And so 1/3 of it came from the actual market. Stephen Machielsen: Okay. That's some good color. So do you expect your traditional lender Tier 1 clients to continue being as aggressive even as it sounds like the mortgage rate spreads are coming in? Brian Lang: Well, we're definitely seeing that to date. So I can't really comment on forward-looking. But even as we enter into this quarter, some of the big Tier 1s are definitely the most aggressive when it comes to setting their 30-year rates. So that's for us, we see that as a positive potential tailwind on the business. But as we talk about, Stephen, I mean, right now, the way our business runs, we are 50% revenue with banks and 50% revenue with nonbanks. And when I take a look at, at least on the appraisal business, we mentioned that this past quarter, we were sequentially moving up market share with 2 of our significant customers, one of them was a bank and one of them was a nonbank. So we continue to set -- build momentum behind both sides of it. But to your point and to your question, definitely some of the larger banks have been stepping up as the spread has come down and been aggressive from a rate standpoint. Operator: Our next question comes from Gavin Fairweather with Cormark. Gavin Fairweather: An impressive level of new logos that you saw there in the first quarter. Maybe you can just discuss kind of the pipeline and how prospects in the pipe reacting to the more recent drop in rates are you seeing more urgency to find new vendors or more RFPs being issued? Any commentary there would be helpful. Brian Lang: Great. Great question, Gavin. And the short answer would be yes. Yes, that we are seeing customers definitely moving on the RFP side of things. I would say I would specifically point to title simply because there has been a significant amount of movement there. As we mentioned last year, we had invested in the sales capabilities on the title side of the business. And I think we're seeing a lot of that being actualized now with more RFPs. And I think, Gavin, to your comment, it's a reaction to the bump that we saw, the little sort of monthly boom that we saw last year, last September, October, '24, '25. And then again, it's been reemphasized with the bump we saw this last quarter, September, October, where all of a sudden, there's a good chunk more volume. I think it's definitely got a lot of lenders thinking about making sure that they've got the capacity to manage that. So from a pipeline standpoint, we mentioned 8 new clients this quarter. Again, I think that's very positive. And not only that, 2 of them are our top 100 customers. So not only bringing on customers, but the right type of customers, one in title, one in appraisal. And as we look forward, Gavin, I'm very ambitious about the pipeline. As I say, I think the sales investments we've made are really starting to pay off. So we hope that we'll continue to be announcing some good wins over the upcoming quarters. I'm going to anticipate your question about Tier 1s. So we do have 2 Tier 1s on the platform now. Again, good news from the last quarter is that we're now in a second channel with the Tier 1 that we just brought on. So we've now sort of diversified with them. And the third Tier 1, our expectation is that we will launch that this year. So we're again, progress on that has gone very well, and now it's just a matter, frankly, of implementation. Gavin Fairweather: Great to hear. So just to clarify, the new channel with the Tier 1 in title, that was with the more recent Tier 1. And maybe you can just -- is that a big opportunity in that channel? Maybe any further color there would be helpful. Brian Lang: Sure. It is the same one that we launched, Gavin. And of course, it's because I think we launched incredibly well and our performance clicked up quite quickly with them from a performance standpoint. So it's -- we launched in the origination channel, and now we've moved into the home equity channel. That's always a decent channel to be in, Gavin. And so we'll have to see how the home equity market performs over the remainder of the year, but we're happy to be in 2 different channels with them. Gavin Fairweather: Great. And then just lastly for me, maybe a longer-term question. We saw the profitability that Real Matters posted in 2020 and 2021 in a busier market. So as we start to think about the volume ramping back up, maybe not to those levels, how do you expect the business to perform versus the last cycle from a profitability perspective? Do you think that you've found additional efficiencies in the business that could drive more profitability? Are there any mitigating factors we should be aware of? Any thoughts there would be great. Rodrigo Pinto: Sure, Gavin. I'll take this one. Yes, for sure, and that's why we set up the target operating model last year. And we see with volumes and scaling the business that we are still very confident that we can achieve the numbers that we have in our target operating model. So seeing similar volumes as the target operating model demonstrates, seeing similar volumes that we saw 2020, 2021, we should do better. We are talking about adjusted EBITDA close to $100 million, which is higher than what we saw before. And that's a consequence of all the operating efficiencies that we put in the system over the last 5 to 6 years. Operator: Our next question comes from John Shao with TD Cowen. John Shao: I just wanted to revisit your key word cautiously optimistic in your prepared remarks. So my question is, where does that caution come from? Is it just based on yesterday's Fed rate decision or just based on the overall recovery timeline? Brian Lang: Yes, good question, John. And listen, it's the overall recovery timeline. So again, if we take a look at what the industry is looking at for Q2, they're looking both MBA and Fannie, they're looking at the market coming down 10% in Q2. So that the cautiously optimistic is sort of more a comment on Q2. But if you look out at the predictions for the year, you're talking more about 50-plus percent growth in the market. So that's really the only caution we have. We're, as I say, quite ambitious around the growth of the business in title. We're now onboarding customers. We're going to start realizing full quarter revenue from, again, the customers we just brought on, and we're looking forward to the pipeline of customers that we think we're going to be able to announce over the next couple of customers at [indiscernible] quarters. So I think that's really -- there's lots of positive in the business. The comment around cautious is simply the market and the seasonality sort of click in Q2. Q3 and Q4, we're thinking the market is going to be in solid shape. John Shao: I appreciate the color. And in terms of gaining more market share with some of the top lenders, could you maybe remind us the pace of that market share gain? Does that happen with -- at the same time with the market recovery? Or is it going to be independent? Brian Lang: Well, that's actually a really good question, John. So if we look very broadly at how we win market share, it's how much we outperform our other competitors. So when the volume is very low, the gap of competition in performance between first and second is tighter than it is when there's significant volume in the business. And we saw that through '20 and '21, where we could really distance ourselves from the second place competitor when it came to performance. So that's why I think this last quarter, we were happy to talk about moving the market share needle forward sequentially with 2 of our larger players in appraisal, it's been somewhat of a challenge the last year or 2 to be able to really move that, again, just because of the differential in performance. So as the business scales, we always talk about that being a significant driver of supporting the increase in market share gains. On the -- so that's really on the appraisal side because, of course, we've been at that business with those Tier 1s for quite some time. What we're seeing on the title side is that our performance is very strong, especially with the Tier 1 that we just brought on because I think we're a new player now amongst that competitive set. So the feedback we got, we actually had our quarterly review yesterday, if you can believe it, and the feedback was incredibly strong. And I think the fact that they've now launched us into the second channel is very supportive of that strength and performance. So I think with the new Tier 1 that we brought on, we'll continue to build share. We've got a small amount of share now, which is always the case. And as we've always talked about in the first year, we try and march forward to 5% to 10% by the end of the year, I think we'll be in a much better place than that with this player by the end of the year. Operator: Our next question comes from Martin Toner with ATB Capital Markets. Martin Toner: My only question is with respect to the potential change in regulatory environment. You guys got a -- the market as a whole got a nice shot in the arm with the [indiscernible] bond buying, spreads came in nicely very quickly. Obviously, affordability is going to be a key election issue in the midterm. As you guys look at what might happen this year and beyond, just any thoughts to if there's further tailwinds for real lenders in terms of regulatory changes? Brian Lang: Sure. So Martin, you were a little bit light there. So I'll just reiterate the question for folks so they can hear it. It was around regulatory either support or challenge as we look forward with the business, specifically, I think, in the U.S. So I think to your question, I think there's a couple of elements. Again, I won't get into the political side of it. But just if I look at how the administration is looking at affordability, I think clearly, they have a couple of mandates, which are, number one, how do we address home affordability. So you're hearing lots of conversations around portable mortgages, around 50-year mortgages. And as you mentioned, Martin, very recently, the direction to the GSEs around purchasing MBS, $200 billion worth of MBS. I think all of those are very positive signs that the administration is very supportive of going after affordability. On another vector, of course, they've been working hard on trying to drop the interest rates. So again, we'll have to see, Martin, how that eventually evolves over time. We've got midterm elections in November. So I'm assuming over the next quarter or 2, there's probably going to be an awful lot of effort from the administration to do their best to bring down affordability and to bring down interest rates. Operator: Our next question comes from Richard Tse with National Bank Capital Markets. Richard Tse: Yes. As we sort of look out through the rest of this year, when you sort of pull together your internal forecast, like what sort of the base case you use for your kind of market volumes for mortgages, both purchase and refi? And I'm sort of just asking because I'm just sort of curious like how conservative you are in that. Do you kind of really just take the sort of the MBA data forecast and kind of use that as a base case? Or do you make your kind of own adjustments here? Rodrigo Pinto: Yes, Richard. So we do look a lot at MBA and Fannie Mae. Of course, we use our judgment as well on top of this. But like based on everything we are seeing right now, it seems to be reasonable that their estimates for the year, right? They have a single-digit increase for purchases for fiscal -- our fiscal 2026. If you average MBA, Fannie Mae, they are around 50% increases in refinance. As you probably have seen out there for next -- for this quarter, Q2, they're not very optimistic about the volumes. They have a decrease of close to 10%. So what it implies that there's a substantial increase coming up Q3, Q4, which, again, seasonality also helps the market during that time of the year. So not calling rates here, but just stating what we are seeing from MBA, Fannie and others in the industry, that's based on a 30-year mortgage rate hovering around 6%. No one is predicting rates going to close to 5%. And that's what we are using for our estimates as well. Richard Tse: Okay. And then I think you sort of briefly touched on the competitive environment. But if you kind of look broadly this year versus same time last year, have there been any sort of moves among that competitive market that has kind of been notable that we should be aware of in terms of what you're seeing? Brian Lang: No, I'd say, Gavin, it's actually been quite -- Richard, it's been quite a quiet year, I would say, year-over-year. We did have quite a bit of movement the year before where we had sort of one of our bigger competitors that was in both title and valuation sold their valuation business. So they exited that business. So we've seen a little bit of that. But beyond that, we had one other player that was purchased from a different company. So there's been a little bit of that sort of movement from one private equity to another. But beyond that, Richard, no, we've seen very little changes really on the competitive front. The only thing I think I would add to Rodrigo's commentary just on where the market is going. Just remember, when we're talking about the minus 10%, we're talking about quarter-over-quarter. So I mean, if you scan back a little bit, year-over-year, the market, I think, is growing in the right direction. And frankly, as we sort of hopefully outlined today, I mean, our big focus has been on bringing on new customers and continue to perform and drive market share. So -- the fortune we have, I think, right now in title is that because that business is really starting to scale now, the way we're looking at the year is a lot of the growth, we're not looking at the market to enhance the growth. We hope it helps. But as I mentioned in this past quarter that we just came out of, 2/3 of our growth in the Title business came from our customer, right, from growing our customers, 1/3 came from the market. So that's -- our focus is less right now on the rates just because as you guys all know, we can't control them. We'd like them to come down. But the focus is really just on continuing to double down on the core business and drive the volume, whether the rates move significantly or not. Richard Tse: Okay. And then sort of going back to the question on competition, like it was more around the question -- the other question is sort of in terms of like UAD and UAD 3.6 readiness, like the fact that you have this platform, I would imagine that gives you a little bit of edge relative to the competitors. And does sort of UAD require you to invest more or the fact that you do have this technology platform, you can sort of make those modifications on a very cost-effective basis? Brian Lang: Richard, I love the industry knowledge of that question. So I'm not sure how many other folks are following the rollout of UAD, which is the new forms that are coming out, which may sound like a small endeavor, but is probably the biggest, I would say, sort of governance change in the industry in the past decade. So it's a really good question, actually, Richard. So I guess I'm happy to announce that we've actually done our first UAD transaction. We did that in the last quarter. So we are the first, frankly, out of the box to do that, and that's because our -- one of our biggest customers is a forerunner in getting prepared for UAD. So it's interesting you say that, Richard. A lot of our competitors are struggling, of course, right now. We put this front and center. We did make the investment. So we've got a couple of million dollars invested in this. We will continue to invest. Good news, some of that investment comes off this year. So we can redeploy and we will redeploy investments into other areas of our platform just to continue to make sure we're doing the things we need to, to future-proof the platform. But your point around UAD, it is a differentiator for us. We'll see what happens over the next little while. We have had customers call and ask us, we probably need to start talking to you because you guys are UAD compliant, and we're struggling with whoever might be servicing them. Operator: There are no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.
Osamu Okuda: I am Okuda, President and CEO. I will provide a summary of our 2025 performance and the outlook for 2026. Please refer to Slide 5. Regarding our full year results for 2025, revenues, operating profit and net income all reached record highs on a core basis. Revenue reached JPY 1,257.9 billion, exceeding our initial forecast by 5.7%. This was primarily driven by higher-than-expected exports of Actemra and Hemlibra to Roche. Operating profit surpassed the JPY 600 billion mark for the first time, representing our ninth consecutive year of profit growth. Operating profit margin also hit a record high of 49.5%. Moving to our 2026 earnings forecast. We anticipate another year of record-breaking results. We are projecting a revenue of JPY 1,345 billion, up 6.9% year-on-year and core operating profit of JPY 670 billion, up 7.5% year-on-year, fueled by growth in domestic product sales, royalty income and other revenue streams. At the same time, we expect to maintain a high operating profit margin. The next slide illustrates our revenue trends. We expect revenue to increase by JPY 87.1 billion or 6.9% compared to 2025. Domestic product sales are projected to rise by JPY 25.6 billion as steady growth of new and mainstay products outweigh the negative impact of NHI price revision and generic competition. Overseas product sales are expected to remain flat year-on-year, while NEMLUVIO and Hemlibra will continue to grow. These gains will be offset by lower export unit prices and a decline in Actemra sales due to biosimilar entry. In contrast, other revenues is set to increase significantly, driven by higher royalty and profit share income from NEMLUVIO and orforglipron and Hemlibra alongside an increase in milestone payments. Next is Page 8. I will discuss our dividend policy. Reflecting our strong 2025 performance, we plan a year-end dividend of JPY 147 per share. This includes an ordinary dividend of JPY 72, up JPY 22 from our initial forecast and 100th anniversary commemorative dividend of JPY 75. Combined with the interim dividend of JPY 125, the total annual dividend will be JPY 272 per share. For 2026, consistent with our policy of targeting an average dividend payout ratio of 45% based on core EPS, we plan to increase the ordinary dividend by JPY 10 from 2025, bringing the forecast annual dividend to JPY 132 per share. Page 9. Moving on, I would like to review our 2025 management policies and priority items. Under strengthening RED functions and value creation, we successfully confirmed the proof of concept for NXT007. Furthermore, we accelerated our focus strategy by deciding to collectively discontinue 5 in-house development projects and making go/no-go decisions on 6 others. Open innovation also progressed steadily as evidenced by the conclusion of 12 new research and technical collaborations. We've seen maximizing value of life cycle management projects despite the delay in Elevidys launch, we achieved several key milestones. This includes the successful Phase III results and subsequent filings for orforglipron and continued growth of domestic mainstay and new products and strategic in-licensing of sparsentan from a third party. Regarding strengthening the foundation, while we faced some challenges in meeting our 2030 midterm environmental goals, overall progress is smooth. Key highlights include the rollout of our new HR system and the launch of a company-wide initiative to accelerate business transformation using AI. This slide details the progress of our R&D projects. In early in-house development, MINT91 and the midsized molecule of 001 transitioned to Phase I, while GYM329 for obesity moved into Phase II. Late-stage development also saw significant progress for products expected to drive future domestic growth, including the addition of sparsentan, the transition of trontinemab to Phase III and positive trial data for giredestrant. Additionally, we have successfully obtained regulatory approval for Elevidys. As our project portfolio expanded through the RED shift, we prioritized the selection and concentration of early-stage projects through collective discontinuations and rigorous go/no-go assessment. Consequently, the number of Phase I projects was reduced from 21 at the end of 2024 to 15, allowing us to focus our resources on high-priority candidates. With 9 projects in Phase II and 28 in Phase III, we continue to maintain a robust and healthy pipeline. 3 projects are currently under regulatory review with approvals expected within this year. Next, Page 11. We're going to review priority items. For strengthening the hemophilia franchise, development of Hemlibra auto-injector progressed, and we confirmed proof of concept for NXT007. For DONQ52, we confirmed biological proof of concept and are steadily progressing towards initiating Phase II studies. Regarding Elevidys, Chugai's first gene therapy product following a fatal case of acute liver failure in an overseas nonambulatory patient, we strengthened safety measures, while maintaining close coordination with relevant authorities. We aim for a prompt launch following reimbursement approval for ambulatory patients aged 3 to 7 years. Regarding the new HR system launched last January, over 20% of all employees volunteered and proportion of job postings in annual personnel transfers exceeded initial target, reaching over 60%. We'll continue to promote employee autonomy and career development. Page 12. We will explain progress in the first 5 years of our 10-year TOP I 2030 plan. Regarding the first pillar, realizing global first-class drug discovery, drug discovery projects and midsized molecule pharmaceuticals made steady progress. We also accelerated external partnerships and investments to drive further innovation, including CVF investments and introduction of RaniPill technologies. For the second pillar, building futuristic business model, we reorganized the value delivery functions of sales, medical and safety. On the production front, we successfully supplied products to meet rapid demand fluctuations and established our own production infrastructure for the future. Simultaneously, we advanced company-wide DX, including projects for the launch of ASPIRE. Page 13. Based on the progress over the past 5 years, we defined 5 targets for the latter half of TOP I 2030. To achieve annual launches of Chugai originated global products, we will enhance early-stage development capabilities, including pharmaceuticals, while collaborating with partnering functions in Japan, U.S., Europe and Singapore to pursue further drug discovery innovation. In production, we'll establish a stable supply system considering geopolitical risks to prepare for increased supply responsibilities accompanying the growth of in-house global products. Furthermore, in the newly entered CVM field and metabolism field, we will build systems and capabilities to enable advanced development, project management, safety, medical affairs and sales activities that respond to the distinct characteristics of this field and changes in the external environment, thereby maximizing the value delivered to patients. To achieve these goals, we will advance the utilization of AI across the entire value chain and drive business transformation. We present the management policies and priority items for 2026, the first year of [indiscernible] 5-year period. The management policies are enhancing RED functions and creating value, maximizing value of LCM projects and strengthening business foundations. The priority items are shown on the right. There are 4 of them. We'll continue to strengthen our hemophilia franchise by advancing development towards application for the Hemlibra auto-injector and initiating Phase II studies for NXT007. We also anticipate the highest number of domestic applications to date. These initiatives are expected to drive short- to medium-term growth in domestic sales. In particular, for Lunsumio, one of the products expected to achieve large-scale growth, we aim for early market penetration of combination therapy with Polivy. We also ensure the successful launch of our new ERP system, ASPIRE, and promote the company-wide utilization of AI. Now looking at the average annual trend in the number of Chugai originated global products launched since 2001, the number has steadily increased in the past. Particularly over the last 5 years, the number of launches of in-house global products have increased, and these products will drive profit growth in the short to medium term. Furthermore, we anticipate that achieving the annual launch of in-house global products target set in TOP I 2030 will lead to further profit growth thereafter. Moving forward, we'll continue to leverage Chugai's unique drug discovery approach to advance drug discovery, including midsized molecules and develop new modalities, thereby expanding the creation of innovative new drugs that only Chugai can deliver. Through these efforts, we'll achieve the TOP I 2030 goals and realize sustainable growth beyond them. The next slide, Page 16. Last but not least, regarding the opening of our U.S. partnering office. We opened the Chugai U.S. Partnering Office in South San Francisco, commencing operations this month. We will explore, identify, evaluate and promote collaborations with U.S. academia and venture companies. In addition to the U.S., we will strengthen our partnership network, connecting Tokyo, London and Singapore to advance global open innovation. Page 17, the last page. This shows the summary of what I said, and that concludes my presentation. Kae Miyata: We have the overview of development pipeline from Kusano. We apologize for the disturbance we had, and we will pause for a few moments at the very beginning of the session. I hope you will make use of that opportunity for a screen capture. Tsukasa Kusano: Thank you. I am Kusano. I am with Project and Lifecycle Management Unit. Please refer to Page 20 of the slides. This looks at our fourth quarter topics. I will go through these starting from first half. We secured 2 approvals. Tecentriq obtained an indication expansion for nresectable thymic carcinoma. Lunsumio was approved for a new subcutaneous injection formulation. On the filing side, there were also 2 key developments for our in-house product orforglipron. Eli Lilly has filed an application in the United States for its use as an obesity treatment. Regarding Tecentriq, we filed an application yesterday for its use as adjuvant therapy in MRD-positive bladder cancer. We also initiated 3 Phase III trials for Roche products; trontinemab for Alzheimer's disease; zilebesiran for hypertension and divarasib for first-line non-small cell lung cancer. Additionally, divarasib received orphan drug designation last December for KRAS G12C mutation-positive unresectable advanced or recurrent NSCLC. There were 2 pipeline divisions. Based on the data accumulated to date, we have decided to discontinue the development of BRY10 for chronic diseases. Furthermore, the development of Tecentriq for perioperative NSCLC was discontinued following the results of the IMpower030 trial. Details regarding recent publications, new contracts and investments by Chugai Ventures Fund are summarized on this slide. Moving on to the second page of topics. For our in-house product, PiaSky, we achieved positive results for Phase III trial for atypical hemolytic uremic syndrome. Orforglipron also met its primary endpoint in its switching trial following the administration of injectable incretins. Furthermore, I am pleased to announce that Enspryng met its primary endpoint in the Phase III trial for myelin oligodendrocyte glycoprotein antibody-associated disease. Based on recent trial data, we plan to file for Gazyva, giredestrant, ranibizumab and sparsentan within 2026. Regarding academic conferences, there were 3 presentations. I will provide a more detailed update on giredestrant later in this session. This is a summary of our major R&D events in 2025. The changes from the previous updates are underlined and shown in bold fonts. While a few items have been carried over to the next fiscal period, we consider these results to be generally highly satisfactory. In particular, looking back, the confirmation of POC for our in-house product, NXT007, a major milestone, and the decision to advance it to Phase III represents a significant progress. Next, I will discuss the major milestones for 2026. A key readout for our in-house portfolio is the Phase III trial of Enspryng for MOGAD, which, as recently announced, successfully met its primary endpoint. Regarding GYM329, we will now refer to it by its international nonproprietary name, INN, emugrobart. We plan to announce results for 3 Phase II trials for emugrobart this year. For SMA and FSHD trials, the data have already been collected, and we look forward to sharing the results with you soon. For Roche product, pivotal trial readouts are scheduled for divarasib, giredestrant, Lunsumio and sefaxersen. Regarding trial starts, we have listed those that have already been publicly disclosed. For NXT007, we have scheduled 3 Phase III trials, including head-to-head comparison with Hemlibra. We also plan to initiate a Phase II trial for DONQ52 in celiac disease. Now I will present the results from 2 trials for giredestrant. First is the evERA trial for hormone receptor-positive/HER2-negative breast cancer in patients previously treated with the CDK4/6 inhibitor. Although these results were presented at last year's ESMO Congress, I would like to review them with you today. Giredestrant is an oral selective estrogen receptor degrader or SERD designed to inhibit estrogen receptor signaling regardless of ESR1 mutation status. It is expected to show efficacy even in tumors that have developed resistance to conventional endocrine therapies, including previous generation SERDs. In, in vitro studies, it demonstrated higher cell proliferation inhibitory activity compared to other oral SERDs. Furthermore, the combination of giredestrant and mTOR inhibitor everolimus is expected to provide superior antitumor activity compared to monotherapy by simultaneously inhibiting 2 key signaling pathways involved in hormone receptor-positive breast cancer proliferation and endocrine resistance. In the evERA trial, this combination significantly improved investigator-assessed PFS, the primary endpoints in both the ESR1 mutation positive and ITT populations. The therapy reduced the risk of disease progression or death by 62% in ESR mutation positive group and 44% in the ITT population. These results suggest that giredestrant plus everolimus could become a valuable new oral treatment option for patients previously treated with CDK4/6 inhibitors, a segment with limited effective alternatives regardless of their ESR1 mutation status. [indiscernible]. Regarding the giredestrant, I would like to introduce lidERA study, which targeted adjuvant therapy for hormone receptor-positive/HER2 negative early-stage breast cancer. This data was also presented at last year's San Antonio Breast Cancer Symposium. Giredestrant demonstrates stronger growth inhibitory effects than estradiol E2 depletion or tamoxifen in ESR1 wild-type cell models with high estrogen receptor signaling activity and endocrine therapy sensitivity as shown by nonclinical data. Furthermore, in the Phase II study of non-adjuvant -- neoadjuvant therapy for early breast cancer, giredestrant demonstrated superior proliferation inhibiting effects compared to aromatase inhibitors or tamoxifen. Based on these results, an interim analysis of the lidERA comparing giredestrant monotherapy with standard endocrine therapy as adjuvant therapy for hormone receptor-positive/HER2-negative early breast cancer showed a significant improvement in the primary endpoint of invasive disease-free survival or IDFS, compared to standard endocrine therapy. In the interim analysis, this reduces the risk of recurrence or death by 30%. These results demonstrate that giredestrant offers the first benefit in approximately 20 years for a new endocrine therapy in early-stage breast cancer, demonstrating the potential to become the new standard of care for adjuvant therapy in hormone receptor-positive/HER2-negative early-stage breast cancer, which accounts for over 70% of early-stage breast cancer cases. Based on evERA and lidERA studies, we plan to file for approval for each this year and look forward to delivering new treatment options to patients. Next, we'll introduce 3 examples of our efforts to promote open innovation for expanding our drug discovery engine. The first is our collaboration with Gero. Gero excels at identifying targets for age-related diseases using a platform that combines physics-based machine learning models with human dataset analysis. By combining Gero's identified targets with our proprietary antibody engineering technologies, we aim to create first-in-class therapies for age-related diseases. The second is Araris. We have entered into a joint research and license option agreement with Araris. Their AraLinQ Technology features high stability in blood, preserves the inherent properties of antibodies, including pharmacokinetics and can carry 2 or 3 payloads. By combining this with our antibody technologies, we aim to create highly differentiated ADCs that achieve a broader therapeutic window and enhanced efficacy. The third is Rani Therapeutics. The company possesses technologies enabling oral administration of biological products featuring painless drug delivery within the intestinal tracts, high drug delivery efficacy and bioavailability comparable to subcutaneous injections. By combining this, again, with our various antibody technologies, we also aim to realize biological products with high convenience through weekly or monthly oral administration with efficacy comparable to intravenous, subcutaneous injections. We will accelerate innovation by collaborating with partners possessing target discoveries and modality technologies that synergizes with our own. Now this slide shows market sales for major projects. Global sales are based on guidance from Roche or Galderma. There are no updates from previously disclosed figures. Within the domestic sales, the upper range section represents our in-house products, while the lower blue section represents Roche products. This slide shows the status of our portfolio across each modality. We continue to hold a robust pipeline of in-house developed projects, all progressing steadily. We're also pleased to announce that we have named our drug discovery technologies for midsized molecules, our third pillar of focus, SnipeTide. Snipe embodies the characteristics of our midsized molecules, high precision binding to intracellular targets via oral administration. Tide evokes the peptides that form the basis of this technology, while also expressing our aspiration for it to become a new trend in peptide drug discovery. We'll continue to focus on the continuous creation and development of our proprietary products or in-house products, including midsized molecule drugs to address unmet medical needs. Last but not least, our projected submissions. Projects marked with light blue stars are newly added ones. Projects marked with green stars have changed since the previous update. Specifically, for giredestrant, we are advancing the application for adjuvant therapy based on the lidERA study that I mentioned to this year. The following slides are attached as reference materials. That concludes my presentation. Thank you. Kae Miyata: Next, we will have from Taniguchi, presentation on FY 2025 consolidated financial overview. We will pause at the very beginning of the presentation. So those of you who wish to take a capture, please use this opportunity to do so. Iwaaki Taniguchi: Hello. I'm Taniguchi. I look forward to working with you today. I would like to describe the full FY 2025 consolidated financial review. As was mentioned by Dr. Okuda, I am pleased to report that cumulative revenue through the fourth quarter reached JPY 1,257.9 billion, up 7.5% year-on-year. Core operating profit also grew to JPY 623.2 billion, a 12.1% increase. Now I will provide details of these results. First, on the revenue. The pharmaceutical product sales rose to JPY 1,077.8 billion, an 8.0% increase year-on-year. By region, domestic sales were JPY 472.4 billion, up 2.5%. We had strong performance from new and mainstay products, effectively offsetting the impact of generic penetration and NHI price revisions. Overseas sales reached JPY 605.4 billion, up 12.8%, continuing to benefit from robust exports of mainstay products through Roche. Those are for product sales. Other revenues, including royalties here, increased by JPY 7.4 billion year-on-year to JPY 180.1 billion. While milestone income from third party declined compared to previous year, this was offset by an increase in Hemlibra royalties from Roche, resulting in an overall year-on-year gain. Turning to expenses. Cost of sales was JPY 351.5 billion, up 4.0% year-on-year. But if you look at the cost ratio, Actemra was relatively high, ratio has dropped slightly from previous year. So negative -- cost of sales ratio for pharmaceutical products improved by 1.3 percentage points to 32.6%. Regarding SG&A expenses, we successfully maintained these at JPY 103.2 billion, flat more or less year-on-year by driving efficiency to offset rising prices and labor costs. R&D expenses rose by JPY 3.2 billion to JPY 180.1 billion, primarily reflecting the impact of yen's depreciation. Other operating income saw a modest JPY 2.7 billion decrease, mainly due to lower gains from product transfers. As a result, operating profit rose by JPY 67.1 billion to JPY 623.2 billion, but the operating profit margin expanded 2 percentage points to 49.5%. Net income after taxes reached JPY 451.0 billion, a 13.6% increase. Next, on the changes from last year in pharmaceutical sales. Starting with domestic at the very bottom, domestic oncology sales were JPY 246.5 billion, a marginal decrease of 0.5% compared to the previous year. Specifically, steady growth in the new product, Phesgo more than offset the decline in Perjeta sales. Additionally, while Lunsumio is off to a strong start, Avastin sales declined due to generic competition. Specialty sales grew by 5.8% to JPY 255.8 billion. There was, yes, NHI price revisions, but in addition to mainstream products, Hemlibra, Actemra and Enspryng and Vabysmo alongside new products PiaSky, all delivered steady growth. Overseas pharmaceutical sales grew 12.8% to JPY 68.6 billion, primarily driven by strong exports of Hemlibra and Actemra. Next summarizes full year export status to Roche of Hemlibra and Actemra. First, Hemlibra. Fourth quarter sales, the final quarter. If you look at that compared to last year, rose by JPY 35.3 billion year-on-year. If you look at the full year cumulative sales, that reached approximately JPY 20 billion above our initial JPY 318.6 billion forecast. Actemra, since biosimilar penetration has been slower than expected, if you look at just the fourth quarter, we have seen -- well, leading to JPY 8.6 billion year-on-year increase on the fourth quarter. Consequently, for the entire year, Actemra forecast of JPY 123 billion was exceeded by approximately JPY 30 billion. So this was increased by about JPY 30 billion. Next, on the changes, this is like a factor analysis and changes in the operating profit. Starting with the Domestic segment on the left. As noted, there has been an impact of NHI price revision to drive higher operating profit. In the Overseas segment, the more we have sales in the emerging markets, the unit price will become lower. So volume growth significantly outweighed the impact of lower export unit prices, combined with favorable foreign exchange movements, these factors will keep contributing to the growth of operating profit. The revenue also contributed to the profit increase, primarily through higher Hemlibra royalties. This is the breakdown of the increased profitability of JPY 672.1 billion. On a quarterly basis, we are comparing P&L trends. Because of the export timing, there will be more ups and downs. If you focus more on the sales, this is by quarter changes. As you can see, the export to overseas, again, because of timing of the product, disease timing, there will be ups and down. Next is the FY 2025, how the outcome actually landed. So how much of a gap there was to what we have expected. As you can see, both the sales and the profit. And for each segment, we have exceeded the projection. So it was greater than 100%. For the expenses, there were some pluses, but it's been slightly lower. So that led to overachieving the operating profit. This is the byproduct sales as compared to the forecast at the beginning of the year. And the inventory situations have changed and there was slight negative, but everything else, like Actemra overseas, Hemlibra overseas and domestic. Overall, compared to our forecast, there was a positive number. Next page is the impact of foreign exchange rate fluctuations and the performance. The actual rate was JPY 161.2, including the forward contracts, which is the basis for the sales recording and JPY 173.57, so JPY 12.50 depreciation. So there was an impact in terms of revenue, JPY 49.6 billion plus and JPY 44.2 billion operating profit on the positive side. And this is the actual rate of pricing compared to the forecast rate. So 80% of the contracts are hedged in the previous year. So 20% are unhedged and use the actual rate, and there's change in exchange rate. So as a result, in 2025, there was a further depreciation of yen. So JPY 5.6 billion in sales and JPY 3.6 billion in plus for operating profit was recorded. And the balance sheet, JPY 2,468.6 billion, which is JPY 260.2 billion increase. There was a working capital increase and also net asset increase because of investments. And net assets increased by JPY 124.2 billion. Compared to total assets, there was a slight lower increase, but there was some interim payment of dividends and 82.1%, which is shareholders' equity ratio, which is over 80%. And here, you're talking about cash status. And last year, at the end of 2024, JPY 996.3 billion, but now there was a decrease of JPY 160.6 billion. And operating cash flow, JPY 452.1 billion, there was further positive size by income tax payment and dividend payments and JPY 170 billion for special dividend was included. So cash increase was slightly suppressed. In total, this shows the trends in ROIC and ROE indicators of capital efficiency. We have been focusing on ROIC so far. But depending on the company, the definitions of ROIC may vary. So in our case, the denominator doesn't include cash. So ROIC has been at the higher level, 43.9% for this year, which is 1 percentage point increase from year-on-year. And as for ROE, which is attracting more attention and definitions are actually universal from company to company for denominator and numerator and 22.1%, which is an increase from the year before. So this is ROE that is way exceeds the capital cost. And this is -- this fiscal's earnings forecast. As Okuda said, as for revenues, 6.9% increase to JPY 1,345 billion. Core operating profit to increase by 7.5% to JPY 670 billion. That is our forecast. Domestic sales are expected to grow despite the headwinds from drug price revisions and generic penetration. We're expecting JPY 25.6 billion growth because of new products growth, so 2.2% growth, which is exceeding the last year's growth. As for overseas exports for products for Hemlibra and NEMLUVIO, they are expected to increase, but there will be further marked impact from the biosimilars in Actemra. So there is JPY 3.4 billion, slight decrease is expected. But for the other revenues, JPY 64.9 billion increase is expected from the previous year, but there will be some foreign exchange impact. The cost side is not going to change that much. So there is going to be a support for profit growth. And this is the slide for the pure product sales aside from the other revenues. And Actemra is significantly negative and Avastin, for various reasons, will remain in the negative territory. But Lunsumio on the other hand, which is a new product, is expected to grow significantly. And Hemlibra overseas will remain on the growth trajectory. And this -- also, this is a core and noncore adjustment. So previously, the intangible asset impairment and also restructuring costs and ERP business foundation system introduction and restructuring costs. These are actually items for core and noncore adjustment items. But in the third quarter, there was also discontinuation of 5 development products that will be recorded. And this is the capital investments currently approved internally. And last page is just for your reference. We have attached details regarding the status of our 5 Chugai-originated global products. That concludes my presentation. Thank you for your attention. Kae Miyata: We will now move on to a Q&A session. We will also have Hidaka, who heads the sales and [indiscernible] who is also representing marketing and the sales to join. [Operator Instructions]. The content of the Q&A session will be uploaded later together with the presentation materials. We would like to take questions first from those in the room, in the venue, and then we will take questions by Zoom webinar. [Operator Instructions]. Kazuaki Hashiguchi: I would like to, first of all, ask about the Hemlibra. And you said that on the core base, this grew by double digit. And based on foreign currency denomination, I think it has also increased. But for this term, if you use that, it is negative, what are your thoughts about the volume as well as unit price? How will this change from last year? And for volume, I would like to know what your forecasts are for end user sales and the fluctuations in inventory in Russia. Unknown Executive: Thank you very much for the questions. For FY '26 on a whole, you are correct. We expect a positive number. But if we do elemental breakdown analysis at the point in time -- as for volume and the foreign exchange impact, we are not disclosing this at the moment. Now at the JPMorgan conference, they talked about the single-digit growth, so positive growth, which means that we would like to replenish the inventory through our export on a whole. Hemlibra guidance number has been as disclosed. Kazuaki Hashiguchi: The second question, in Dr. Okuda's presentation, auto-injector filing for Hemlibra has been mentioned several times. I believe that this is a very important agent in terms of competitiveness. When do you expect this to become available? Is it very close? Or do you still have some issues that needs to be resolved before that can take place? I would like to know more about the progress of this product. Unknown Executive: Thank you very much for asking about Hemlibra AI. We are moving along very steadily in terms of development. We are not disclosing the dates, but we would like to provide the Hemlibra AI to the patients as quickly as possible. So we are doing everything possible to move things forward. Unknown Executive: The person next to him please. Unknown Analyst: [ Yokoyama ] from [ Nikkei Medical ]. Giredestrant is what I like to ask about. So many companies are developing oral SERD drugs, but how do you look at the differentiation from competitors? The inavolisib is going to be a set of those, and this is going to be significant with the combination with inavolisib in breast cancer, but there is no schedule for filing for inavolisib. How do you see this? Unknown Executive: So giredestrant question. Thank you very much for your question, Yokoyama-san. Other SERD products comparison with those, as I said in the slide, in the in vitro test -- trial, giredestrant compared to other SERD oral product, proliferation suppression inhibitory activities were shown. And in the lidERA study, giredestrant and everolimus combination therapy compared to the conventional standard of care, ESR1 positive patients in addition to that population, ESR1 non-mutant population, there was a PFS that is statistically significantly achieved. So ESR -- regardless of ESR1 mutation, there was efficacy that was proven in the SERD oral product. So the CKD inhibitor -- previously treated with CDK inhibitor patients had a bad prognosis. So there's high hopes on that. And giredestrant and everolimus combination therapy, if you look at this, they are both oral drugs. So there is no injection to be required. So there's high convenience and 2 different signal pathways can be inhibited simultaneously. So compared to monotherapy, there is a higher antitumor effect expected and also adjuvant -- compared to endocrine therapy, standard of care at the interim analysis, primary endpoint was achieved. And for early breast cancer as a new endocrine therapy, this is the first one in the last 20 years, new benefit was brought about. So this could become an adjuvant standard of care. So there's a high hope. And more than 70% of early breast cancer is the target for this study. So we are hoping that giredestrant can contribute to many patients. And as for inavolisib, there is one study with a combination with inavolisib by Roche. But at the moment, the combination of giredestrant and inavolisib, there's no plan for a study with that. Unknown Analyst: But with the study of giredestrant and everolimus, what sort of strategy can work out will be something that we work with Roche. So that's not my question. ESR can be covered, but CDK4 and 6 has to be suppressed. But -- there's studies overseas, but Japan has not participated, but Phase II study will be done in Japan, and there will be a bridging study. And then at that timing, the inavolisib can be used for the oral SERD study. So when will it be? Unknown Executive: As for inavolisib, as you said, Phase I study is now underway, and there will be bridging with overseas study data to file for approval. But at this moment, I'm sorry, but we're not in a position to disclose that timing. Unknown Analyst: So for the timing of filing has not been disclosed. And what you filed for yesterday, the bladder cancer, MRD-positive patients. So for all comers, nivo can be used and [indiscernible] has been presented as part of the data. And so to other -- compared to other products, what will be the superiority of this drug? Unknown Executive: I'm not sure who this is addressed to. So Tecentriq adjuvant, the muscular invasive bladder cancer. Thank you for your question. And compared to PFS, in OS, the primary and secondary endpoint, there was a statistically significant benefit that was proven. And in the CDR monitoring, the atezolizumab or we can identify patients that can benefit from atezolizumab. There could be avoidance of overtreatment or personalized medicine can be done with the CDR approach. So the patients with lower risk can avoid overtreatment. That will be the benefit. Unknown Executive: We now would like to invite questions who are joining us through Zoom webinar. [Operator Instructions]. From JPMorgan, Wakao-san, please. Seiji Wakao: Wakao with JPMorgan. The first question -- first of my questions is related to the royalty other than coming from Roche and also other revenues. Royalty from other than Roche is both for orforglipron and nemolizumab sales or increase thereof, I believe, am I right? If that is the case, orforglipron has not been approved. So I would like to know how you are incorporating that. And we also expect the sales to grow considerably. I would like to have you comment on this. Iwaaki Taniguchi: This is Taniguchi speaking. Thank you Wakao-san. Revenue stream from other than Roche, yes, is expanding in '26. And you are absolutely right in your understanding. Vast majority comes from those 2 product royalties. That's true. But other sales revenue, in general terms, this is like milestone payment. Seiji Wakao: Now as for the content, this still is not disclosed, including what we are filing today, we have introduced several assumptions and have reflected in what we are saying. I would like you to tell us about how you incorporate the orforglipron. I think because the product is not out there, you must be exercising conservatism? Unknown Executive: Yes, for anything that is uncertain, our basic thinking is to make sure that we will use reasonable assumptions. Seiji Wakao: Second question is about 45% dividend payout ratio. The operating profit in the mid- to long term will lead to greater profit and you are focused more on ROE, which means that at some point in time in the future, you will raise payout ratio. There are no reasons for you not to. Are you discussing this internally of raising the payout ratio to above 45%? And if you have decided no, why? Unknown Executive: Thank you Wakao-san for that question. We have provided last year at this timing, our capital allocation policies, and we wanted to target 40% stably. And so dividend payment included is based on that. For the time being, we have no plans of revising or reviewing this. And I'm sure you understand that. Now the question is, will we ever consider revisiting? Are we not going to revise this ever? Well, we cannot say anything definitive at this point in time. We'll be looking at the objectively our situation as well as our financial conditions. Now ROE, yes, we are looking at our cost of capital, and we have disclosed this, we consider to be about 7%, which means that our ROE is well above that. So it's not that we are going to make active adjustment of the capital. We don't think that we are at the situation where we need to boost ROE today. In any case, we should continue to maintain and try to strive for improvement of capital efficiency. Kae Miyata: Muraoka-san, MUFJ Securities. Mr. Muraoka, please. Shinichiro Muraoka: I'm Muraoka from Morgan Stanley. My question is also addressed to Taniguchi-san for the forecast or guidance for a more detailed way of interpretation. The Slide 7, the forecast by product. So overseas and others, there will be an increase of JPY 70 billion, which is significant. And NEMLUVIO export will probably the biggest contributor. And if that's the case, then the royalties from entities other than Roche, the increase of JPY 730 billion compared to NEMLUVIO also would be larger. That's our guess. Is that something that is valid? Iwaaki Taniguchi: Thank you very much for your question, Taniguchi speaking. For the breakdown of royalties for the portions that are not from Roche, those 2 that you mentioned is overwhelmingly important. That's what I can tell you. But as for the allocation between these 2, at the moment, we cannot answer that question. So also orforglipron, it has not been launched yet. And you have to look at the timing of launch, which is quite difficult discussion. So we remain undisclosed for the allocation. As for exports. As for NEMLUVIO exports, so this was recorded in the previous fiscal year. But for this fiscal year, we still continue to expect growth, and that has been incorporated in our guidance that we provided at this time. Does that answer your question? Shinichiro Muraoka: So overseas others, JPY 32.6 billion, JPY 17 billion year-on-year, it is mostly from NEMLUVIO. Iwaaki Taniguchi: Yes. Shinichiro Muraoka: And also the breakdown of this Page 7, the domestic and specialties and others sales, JPY 33.3 billion year-on-year growth of JPY 12 billion. Tamiflu is not going to grow. So what's included in this number? Earlier, you talked about P&L cost of goods -- cost of sales ratio that is assumed to increase. So maybe the products that are included here have higher cost of sales. So those that are not in the pipeline, but there is something that you are going to start to sell. That's my personal guess, but am I wrong? Iwaaki Taniguchi: For the cost of sales ratio, compared to '25, in 2026, there's a positive growth. The background, there is a lot of factors. But if you compare domestic and overseas sales, the cost of sales ratio is much higher in domestic products. So this is related to products. So overseas, there's JPY 3.4 billion decline, but JPY 20 billion increase for domestic sales. So domestic product ratio has increased, and that has brought up the cost of sales overall. As for more details, it is not disclosed, but you mentioned Tamiflu. There are various factors involved, products that are not mentioned and that are expected to grow this year that are included in others. Shinichiro Muraoka: So that those are expected to grow are not in the pipeline or the filing schedule on Page 39. Those are not included in those schedules? Iwaaki Taniguchi: No, no, no. That's not the case. There are some that are included. So -- but all that are expected to be filed are anticancer drugs. Shinji Hidaka: Well, Hidaka from sales speaking. As you said, there's still uncertainty, a lot of uncertainty. But Elevidys, gene therapy sales are incorporated to some extent. And maybe that would satisfy your question. Kae Miyata: Next, from Citigroup, Yamaguchi-san, please. Hidemaru Yamaguchi: Yes. At the very beginning about the update of midterm business plan. You talked about the production efficiency of blockbusters have improved from 0.3 to 0.6. My understanding, of course, is you are aiming for 1. Although there are different risks based on current pipeline, do you think that you are achieving what you can achieve? So what are your thoughts about this 0.6 vis-a-vis 2026 and 2030? Osamu Okuda: This is Okuda speaking. Thank you, Yamaguchi-san, for your questions. So you're looking at this slide, right? Looking back, in the 2000s, it was 0.1. So 1 per 20. In the 2010, it tripled. And in the 5 years since we began the Strategy 2030, we have actually launched 3. You talked about, Yamaguchi-san, blockbusters, but this is about global in-house original product being successfully developed and launched. We are focused on antibody plus a small molecule that we have achieved launch targets between 2026 through to 2030. So in the latter half of TOP I 2030, our strategy is to further increase this. As we talk about midsized molecule, middle molecule, the white will gradually become more purple. If we succeed beyond 2031, this could become like 1 every year or greater global launch that will further drive growth or even better than that. Hidemaru Yamaguchi: With increased modality, there's this growth will increase because of the midsized module. Unknown Executive: Yes, we will look at antibody, small molecule, mid-molecule and our imbalance. And we're talking about other modalities. We were discussing this in the TOP I 2030 strategy discussion. We hope to achieve multi-modalities. So we want to increase that. Hidemaru Yamaguchi: The other question is giredestrant, which you have explained in length, and we have high expectations. What is your peak sales forecast? Or is it too early? Unknown Executive: Well, thank you for that question. For giredestrant, we are not disclosing that. Hidemaru Yamaguchi: What would be the TAM in Japan? So the targeted market size. Number of patients or the existing market size is probably quite large, but I would like to know which segment you are targeting? If you don't have that information, if you could provide information later? Unknown Executive: Yes, we would like to confirm and get back to you. Kae Miyata: From Macquarie Capital, Mr. Tony Ren, please. Tony Ren: The first question I would like to ask is about your CapEx. You commented on the Araris partnership for ADCs, right? My understanding is that the CapEx can be very intensive for ADCs. In fact, one of your peer companies recently announced a very large CapEx project for their ADCs. So I just wanted to see how are you thinking about the CapEx related to the ADC drugs? Are you building the production capacity internally? Are you using CDMOs? Are you using facilities from Roche? Is this included in your CapEx budget for 2026? So that's my first question. Iwaaki Taniguchi: Thank you very much for your question, Mr. Tony Ren. As for the CapEx, for the current status, Araris and Chugai Pharmaceutical are now engaged in joint research. So we haven't discussed the CapEx. We just engaged in joint research. Therefore, as for the 2026 in the CapEx budget, this was not included. Tony Ren: Okay. Very good. My second question is on the development of your GYM329/emugrobart in obesity. So the [indiscernible] Phase II trial of emugrobart in obesity. If we look at the clinicaltrials.gov, the primary completion is August 2026. Can you confirm that you will be releasing Phase II results roughly around that time as well? Unknown Executive: GYM329 Phase II trial. Thank you very much for your question on that. So at the outset, as I said in the presentation, the result of the clinical study is going to be released by the end of this fiscal year. Kae Miyata: [indiscernible] from UBS Securities, we have [indiscernible]. Unknown Analyst: I'm [indiscernible] with UBS. We congratulate you on an excellent performance. In other revenues, this royalty or milestone is -- it includes something -- some items that are outside of Chugai's control. If the actual revenue, other revenue, does that meet your target? What are some avenues that will change or don't we need to worry about this because you are being very conservative? Iwaaki Taniguchi: Thank you very much [indiscernible], I am Taniguchi. The latter, we have exercised conservatism. But if it is so unexpected happen, we cannot negate the possibility that something will happen outside this. But how this will be absorbed within the entire portfolio? This is something that we will be communicating to you in the quarterly earnings call. So we will keep you appraised or updated within the project planning. Unknown Analyst: The second question has to do with biological POC of DONQ52. And I would like you to supplement my understanding. What does this mean? In Phase I study like PBMC, like peripheral blood monocytes? Or are you looking at that kind of response at the cellular level? Unknown Executive: Thank you very much for that question about the DONQ52. We have conducted what we call Phase IC study. This is celiac disease patients who are stable after administering DONQ52 in such patients for 3 days, we challenge them with [indiscernible]. And gluten-dependent immune response is what we are trying to induce. And then we give DONQ52 to see if gluten-dependent immune response can be suppressed. In this study, in addition to PK, we'll be looking at pharmacological action. T-cell activation suppression due to gluten ingestion is also looked into as well as other biomarkers. Unknown Analyst: What was the outcome of the 3-day challenge study? Unknown Executive: We are now in the process of analyzing this. And when we are ready to publish data, we would like to do so. Kae Miyata: Next, from SMBC Nikko Securities, Mr. Wada, please. Hiroshi Wada: Wada from SMBC Nikko Securities. So I'd like to also ask about DONQ52. So licensing out schedule, how do you look at that schedule and development. As you saw, Phase II study is going to be initiated. So as I heard, this is going to be licensed out to other companies. I think that is the main strategy. Maybe it would be the Phase II timing that you're going to do that. But this is going to be -- Phase II is going to be performed by your own company on your own. So what will be the timing of Phase II as you see it? Unknown Executive: So Wada-san, thank you very much for your question on DONQ52. For licensing out strategy and timing of individual products, we cannot answer those questions. But the Phase II study that we announced this time would be performed by Chugai Pharmaceutical. Just for clarification. So in the Roche pipeline, this is in Phase I. Hiroshi Wada: So you're not aligned with Roche on this particular product. Is that correct? Unknown Executive: Probably. This is not described in the Roche material or pipeline. We don't have the information that they have introduced this. So in the Roche pipeline, Chugai's projects are also described, but this is -- this doesn't show that they have licensed in our product. As Yamaguchi-san asked Page 15, TOP I 2030, 1 per year global product launch that is target. And I'd like to ask about the strategy of research and development. So from 2011 to 2020, 0.3 per year, but '21 to '25 0.6 per year, it has doubled. But R&D around 2015, JPY 80 billion was spent. And in '23, JPY 160 billion. So this was doubled as well. Hiroshi Wada: So that's why the number of launches has been increased. I understand that. But between now and 2030, if you are to launch 1 per year, then 1.5x R&D expenses will be required. So in order to achieve on 1 launch per year, what is your expectation on the R&D expenses or spending? Unknown Executive: Okuda will answer that question first. And then for the future R&D investments, I would like to ask Taniguchi to answer the question. Osamu Okuda: So the R&D expenses and number of launches, whether they are correlated or linked, it's not necessarily the case. So the number of launches, what would be the function of this? So R&D -- aside from R&D, but the cycle time of development, the speed of development and probability of success, those will be significant factors. So there is a time line between R&D activities and launch of the products. So there is not that simple correlation. So as a principle for R&D activities, high-quality products have to be developed. So this has been the case in the past, but with a higher probability of success, we came up with the molecule in the Phase III development. The first indication has achieved 100% success probability. So that quality principle has to be maintained or expanded while engaged in this drug development. So R&D expenses and number of launches are not directly related necessary. But on the other hand, if you look at R&D expenses, it includes the personnel cost, and this is a very important resources to drive research. So this R&D expenses have been increased in accordance with the profit increase. So I'd like to ask Taniguchi to add up. Iwaaki Taniguchi: Compared to 2025, 5.5% increase was recorded. That was a fact. But as Okuda said -- so the productivity increase is something that we give priority and that is also true for R&D by utilizing AI and go or no-go decision will be further refined. So we are hoping to enhance productivity. So it doesn't necessarily mean that R&D expenses are going to keep going up rapidly. And the target for percentage of R&D expenses, there is no such figure that we have in mind. But as the projects make progress, there could be increase in development expenses. That could be the one that we might end up with, but we're also keeping an eye on productivity and efficiency so that we can maximize our efforts. Kae Miyata: Next from Bernstein, Sogi-san, please. Miki Sogi: About Hemlibra. I have two questions. The first question is related to overseas sales. This time in 2026, the assumption on Swiss franc, I mean, you are expecting 6% depreciation of the yen. If that is your assumption, Hemlibra, I understand the plan is to decrease. Of course, sales in the international market, I mean, by Roche or by Hemlibra going up, you said will lead to lower unit price. Even if the volume increases, the lower unit price will have greater effect. So you're selling more, but is it possible that the yen amount exports come down? Is that possible? Iwaaki Taniguchi: Thank you very much, Sogi-san, this is Taniguchi speaking. Hemlibra forecast for this year, and you're asking about the breakdown, which, of course, is related to unit price, volume and foreign exchange factors. I would like to keep from giving you any responses in detail, but it is true that there has been a foreign exchange effect, positive. What about the net of that? Then we have the unit price multiple wide by volume. Unit price actually has to do with the weighted average in the market previous year applied. So we will be looking at market price and that sort of decides what the export price is going to be. Volume is something that's updated every term in emerging markets, not just the emerging markets, but it is possible that volume increase globally. This has happened in the past. So there's no reason to think that this will not happen in the future. And that multiplied by unit price will give us the results. Miki Sogi: Also about Hemlibra. And this is related to auto-injector. By launching this, what level of upside do you expect? Hemlibra, I believe, has penetrated the market. Uptake has been great. So who are the patients that have not been able to capture without the auto-injector? And I also would like to understand what Roche has in mind related to this. Unknown Executive: Well, I would like to respond. Auto-injector development for Hemlibra, we have been striving with the aim of raising convenience of our patients. If we have auto-injector of Hemlibra, we expect the uptake to increase, but [indiscernible] competition could come up with a very convenient device. So please do understand that we are being defensive -- we're taking a defensive approach to that, too. Kae Miyata: Because of time, we would like to take one last question from Goldman Sachs, we have Ueda-san. Akinori Ueda: Ueda from Goldman Sachs securities. The first question is about the U.S. partnering office that has been launched. So at the moment, in the previous activities, what were the challenges that you faced to trigger this? And what kind of effects that you're expecting out of this initiative? Unknown Executive: Thank you for the question. Well, as for U.S. partnering office, this is located in South San Francisco and the West Coast, and it just started operation. So in Silicon Valley, there are many bioventures and universities in the U.S. There are numerous universities located there. And of course, we can keep communication from Japan, but by physically locating in the area, bioventures and academia and venture capitals, we will have closer communication with those parties so that we can achieve open innovation. The drug discovery capabilities increase is the primary purpose, but there will be effective results that we can expect. So that's why we've decided to locate our office in West Coast or South San Francisco. But ahead of this, there was a corporate venture capital that was established in 2023 in Boston, and it's been already 2 years since the start of the operation. And we went into venture communities and from venture companies or start-up companies, there was a lot of information that we received. So as the technology reaches maturity, we could have a joint collaboration with those, and there's a link there as well. But it's not just in the U.S., but in Singapore, there is a similar function. And there's also a partnering function in London and Chugai headquarters, Tokyo headquarters, has this function. So by establishing a global partnering network, we are hoping to increase our drug discovery capabilities. That's our intention. Kae Miyata: Thank you very much. With that, we would like to conclude Chugai Pharmaceutical fiscal year 2025 financial results presentation. We apologize for the difficulty that you experienced at the first half of the presentation. We will provide backup information via web. If there are any questions that you were not able to ask, please do contact us at the corporate IR. The phone number as well as mail address is shown on the last page of the presentation material. Thank you very much once again for joining us, taking time out of your various schedules.
Osamu Okuda: I am Okuda, President and CEO. I will provide a summary of our 2025 performance and the outlook for 2026. Please refer to Slide 5. Regarding our full year results for 2025, revenues, operating profit and net income all reached record highs on a core basis. Revenue reached JPY 1,257.9 billion, exceeding our initial forecast by 5.7%. This was primarily driven by higher-than-expected exports of Actemra and Hemlibra to Roche. Operating profit surpassed the JPY 600 billion mark for the first time, representing our ninth consecutive year of profit growth. Operating profit margin also hit a record high of 49.5%. Moving to our 2026 earnings forecast. We anticipate another year of record-breaking results. We are projecting a revenue of JPY 1,345 billion, up 6.9% year-on-year and core operating profit of JPY 670 billion, up 7.5% year-on-year, fueled by growth in domestic product sales, royalty income and other revenue streams. At the same time, we expect to maintain a high operating profit margin. The next slide illustrates our revenue trends. We expect revenue to increase by JPY 87.1 billion or 6.9% compared to 2025. Domestic product sales are projected to rise by JPY 25.6 billion as steady growth of new and mainstay products outweigh the negative impact of NHI price revision and generic competition. Overseas product sales are expected to remain flat year-on-year, while NEMLUVIO and Hemlibra will continue to grow. These gains will be offset by lower export unit prices and a decline in Actemra sales due to biosimilar entry. In contrast, other revenues is set to increase significantly, driven by higher royalty and profit share income from NEMLUVIO and orforglipron and Hemlibra alongside an increase in milestone payments. Next is Page 8. I will discuss our dividend policy. Reflecting our strong 2025 performance, we plan a year-end dividend of JPY 147 per share. This includes an ordinary dividend of JPY 72, up JPY 22 from our initial forecast and 100th anniversary commemorative dividend of JPY 75. Combined with the interim dividend of JPY 125, the total annual dividend will be JPY 272 per share. For 2026, consistent with our policy of targeting an average dividend payout ratio of 45% based on core EPS, we plan to increase the ordinary dividend by JPY 10 from 2025, bringing the forecast annual dividend to JPY 132 per share. Page 9. Moving on, I would like to review our 2025 management policies and priority items. Under strengthening RED functions and value creation, we successfully confirmed the proof of concept for NXT007. Furthermore, we accelerated our focus strategy by deciding to collectively discontinue 5 in-house development projects and making go/no-go decisions on 6 others. Open innovation also progressed steadily as evidenced by the conclusion of 12 new research and technical collaborations. We've seen maximizing value of life cycle management projects despite the delay in Elevidys launch, we achieved several key milestones. This includes the successful Phase III results and subsequent filings for orforglipron and continued growth of domestic mainstay and new products and strategic in-licensing of sparsentan from a third party. Regarding strengthening the foundation, while we faced some challenges in meeting our 2030 midterm environmental goals, overall progress is smooth. Key highlights include the rollout of our new HR system and the launch of a company-wide initiative to accelerate business transformation using AI. This slide details the progress of our R&D projects. In early in-house development, MINT91 and the midsized molecule of 001 transitioned to Phase I, while GYM329 for obesity moved into Phase II. Late-stage development also saw significant progress for products expected to drive future domestic growth, including the addition of sparsentan, the transition of trontinemab to Phase III and positive trial data for giredestrant. Additionally, we have successfully obtained regulatory approval for Elevidys. As our project portfolio expanded through the RED shift, we prioritized the selection and concentration of early-stage projects through collective discontinuations and rigorous go/no-go assessment. Consequently, the number of Phase I projects was reduced from 21 at the end of 2024 to 15, allowing us to focus our resources on high-priority candidates. With 9 projects in Phase II and 28 in Phase III, we continue to maintain a robust and healthy pipeline. 3 projects are currently under regulatory review with approvals expected within this year. Next, Page 11. We're going to review priority items. For strengthening the hemophilia franchise, development of Hemlibra auto-injector progressed, and we confirmed proof of concept for NXT007. For DONQ52, we confirmed biological proof of concept and are steadily progressing towards initiating Phase II studies. Regarding Elevidys, Chugai's first gene therapy product following a fatal case of acute liver failure in an overseas nonambulatory patient, we strengthened safety measures, while maintaining close coordination with relevant authorities. We aim for a prompt launch following reimbursement approval for ambulatory patients aged 3 to 7 years. Regarding the new HR system launched last January, over 20% of all employees volunteered and proportion of job postings in annual personnel transfers exceeded initial target, reaching over 60%. We'll continue to promote employee autonomy and career development. Page 12. We will explain progress in the first 5 years of our 10-year TOP I 2030 plan. Regarding the first pillar, realizing global first-class drug discovery, drug discovery projects and midsized molecule pharmaceuticals made steady progress. We also accelerated external partnerships and investments to drive further innovation, including CVF investments and introduction of RaniPill technologies. For the second pillar, building futuristic business model, we reorganized the value delivery functions of sales, medical and safety. On the production front, we successfully supplied products to meet rapid demand fluctuations and established our own production infrastructure for the future. Simultaneously, we advanced company-wide DX, including projects for the launch of ASPIRE. Page 13. Based on the progress over the past 5 years, we defined 5 targets for the latter half of TOP I 2030. To achieve annual launches of Chugai originated global products, we will enhance early-stage development capabilities, including pharmaceuticals, while collaborating with partnering functions in Japan, U.S., Europe and Singapore to pursue further drug discovery innovation. In production, we'll establish a stable supply system considering geopolitical risks to prepare for increased supply responsibilities accompanying the growth of in-house global products. Furthermore, in the newly entered CVM field and metabolism field, we will build systems and capabilities to enable advanced development, project management, safety, medical affairs and sales activities that respond to the distinct characteristics of this field and changes in the external environment, thereby maximizing the value delivered to patients. To achieve these goals, we will advance the utilization of AI across the entire value chain and drive business transformation. We present the management policies and priority items for 2026, the first year of [indiscernible] 5-year period. The management policies are enhancing RED functions and creating value, maximizing value of LCM projects and strengthening business foundations. The priority items are shown on the right. There are 4 of them. We'll continue to strengthen our hemophilia franchise by advancing development towards application for the Hemlibra auto-injector and initiating Phase II studies for NXT007. We also anticipate the highest number of domestic applications to date. These initiatives are expected to drive short- to medium-term growth in domestic sales. In particular, for Lunsumio, one of the products expected to achieve large-scale growth, we aim for early market penetration of combination therapy with Polivy. We also ensure the successful launch of our new ERP system, ASPIRE, and promote the company-wide utilization of AI. Now looking at the average annual trend in the number of Chugai originated global products launched since 2001, the number has steadily increased in the past. Particularly over the last 5 years, the number of launches of in-house global products have increased, and these products will drive profit growth in the short to medium term. Furthermore, we anticipate that achieving the annual launch of in-house global products target set in TOP I 2030 will lead to further profit growth thereafter. Moving forward, we'll continue to leverage Chugai's unique drug discovery approach to advance drug discovery, including midsized molecules and develop new modalities, thereby expanding the creation of innovative new drugs that only Chugai can deliver. Through these efforts, we'll achieve the TOP I 2030 goals and realize sustainable growth beyond them. The next slide, Page 16. Last but not least, regarding the opening of our U.S. partnering office. We opened the Chugai U.S. Partnering Office in South San Francisco, commencing operations this month. We will explore, identify, evaluate and promote collaborations with U.S. academia and venture companies. In addition to the U.S., we will strengthen our partnership network, connecting Tokyo, London and Singapore to advance global open innovation. Page 17, the last page. This shows the summary of what I said, and that concludes my presentation. Kae Miyata: We have the overview of development pipeline from Kusano. We apologize for the disturbance we had, and we will pause for a few moments at the very beginning of the session. I hope you will make use of that opportunity for a screen capture. Tsukasa Kusano: Thank you. I am Kusano. I am with Project and Lifecycle Management Unit. Please refer to Page 20 of the slides. This looks at our fourth quarter topics. I will go through these starting from first half. We secured 2 approvals. Tecentriq obtained an indication expansion for nresectable thymic carcinoma. Lunsumio was approved for a new subcutaneous injection formulation. On the filing side, there were also 2 key developments for our in-house product orforglipron. Eli Lilly has filed an application in the United States for its use as an obesity treatment. Regarding Tecentriq, we filed an application yesterday for its use as adjuvant therapy in MRD-positive bladder cancer. We also initiated 3 Phase III trials for Roche products; trontinemab for Alzheimer's disease; zilebesiran for hypertension and divarasib for first-line non-small cell lung cancer. Additionally, divarasib received orphan drug designation last December for KRAS G12C mutation-positive unresectable advanced or recurrent NSCLC. There were 2 pipeline divisions. Based on the data accumulated to date, we have decided to discontinue the development of BRY10 for chronic diseases. Furthermore, the development of Tecentriq for perioperative NSCLC was discontinued following the results of the IMpower030 trial. Details regarding recent publications, new contracts and investments by Chugai Ventures Fund are summarized on this slide. Moving on to the second page of topics. For our in-house product, PiaSky, we achieved positive results for Phase III trial for atypical hemolytic uremic syndrome. Orforglipron also met its primary endpoint in its switching trial following the administration of injectable incretins. Furthermore, I am pleased to announce that Enspryng met its primary endpoint in the Phase III trial for myelin oligodendrocyte glycoprotein antibody-associated disease. Based on recent trial data, we plan to file for Gazyva, giredestrant, ranibizumab and sparsentan within 2026. Regarding academic conferences, there were 3 presentations. I will provide a more detailed update on giredestrant later in this session. This is a summary of our major R&D events in 2025. The changes from the previous updates are underlined and shown in bold fonts. While a few items have been carried over to the next fiscal period, we consider these results to be generally highly satisfactory. In particular, looking back, the confirmation of POC for our in-house product, NXT007, a major milestone, and the decision to advance it to Phase III represents a significant progress. Next, I will discuss the major milestones for 2026. A key readout for our in-house portfolio is the Phase III trial of Enspryng for MOGAD, which, as recently announced, successfully met its primary endpoint. Regarding GYM329, we will now refer to it by its international nonproprietary name, INN, emugrobart. We plan to announce results for 3 Phase II trials for emugrobart this year. For SMA and FSHD trials, the data have already been collected, and we look forward to sharing the results with you soon. For Roche product, pivotal trial readouts are scheduled for divarasib, giredestrant, Lunsumio and sefaxersen. Regarding trial starts, we have listed those that have already been publicly disclosed. For NXT007, we have scheduled 3 Phase III trials, including head-to-head comparison with Hemlibra. We also plan to initiate a Phase II trial for DONQ52 in celiac disease. Now I will present the results from 2 trials for giredestrant. First is the evERA trial for hormone receptor-positive/HER2-negative breast cancer in patients previously treated with the CDK4/6 inhibitor. Although these results were presented at last year's ESMO Congress, I would like to review them with you today. Giredestrant is an oral selective estrogen receptor degrader or SERD designed to inhibit estrogen receptor signaling regardless of ESR1 mutation status. It is expected to show efficacy even in tumors that have developed resistance to conventional endocrine therapies, including previous generation SERDs. In, in vitro studies, it demonstrated higher cell proliferation inhibitory activity compared to other oral SERDs. Furthermore, the combination of giredestrant and mTOR inhibitor everolimus is expected to provide superior antitumor activity compared to monotherapy by simultaneously inhibiting 2 key signaling pathways involved in hormone receptor-positive breast cancer proliferation and endocrine resistance. In the evERA trial, this combination significantly improved investigator-assessed PFS, the primary endpoints in both the ESR1 mutation positive and ITT populations. The therapy reduced the risk of disease progression or death by 62% in ESR mutation positive group and 44% in the ITT population. These results suggest that giredestrant plus everolimus could become a valuable new oral treatment option for patients previously treated with CDK4/6 inhibitors, a segment with limited effective alternatives regardless of their ESR1 mutation status. [indiscernible]. Regarding the giredestrant, I would like to introduce lidERA study, which targeted adjuvant therapy for hormone receptor-positive/HER2 negative early-stage breast cancer. This data was also presented at last year's San Antonio Breast Cancer Symposium. Giredestrant demonstrates stronger growth inhibitory effects than estradiol E2 depletion or tamoxifen in ESR1 wild-type cell models with high estrogen receptor signaling activity and endocrine therapy sensitivity as shown by nonclinical data. Furthermore, in the Phase II study of non-adjuvant -- neoadjuvant therapy for early breast cancer, giredestrant demonstrated superior proliferation inhibiting effects compared to aromatase inhibitors or tamoxifen. Based on these results, an interim analysis of the lidERA comparing giredestrant monotherapy with standard endocrine therapy as adjuvant therapy for hormone receptor-positive/HER2-negative early breast cancer showed a significant improvement in the primary endpoint of invasive disease-free survival or IDFS, compared to standard endocrine therapy. In the interim analysis, this reduces the risk of recurrence or death by 30%. These results demonstrate that giredestrant offers the first benefit in approximately 20 years for a new endocrine therapy in early-stage breast cancer, demonstrating the potential to become the new standard of care for adjuvant therapy in hormone receptor-positive/HER2-negative early-stage breast cancer, which accounts for over 70% of early-stage breast cancer cases. Based on evERA and lidERA studies, we plan to file for approval for each this year and look forward to delivering new treatment options to patients. Next, we'll introduce 3 examples of our efforts to promote open innovation for expanding our drug discovery engine. The first is our collaboration with Gero. Gero excels at identifying targets for age-related diseases using a platform that combines physics-based machine learning models with human dataset analysis. By combining Gero's identified targets with our proprietary antibody engineering technologies, we aim to create first-in-class therapies for age-related diseases. The second is Araris. We have entered into a joint research and license option agreement with Araris. Their AraLinQ Technology features high stability in blood, preserves the inherent properties of antibodies, including pharmacokinetics and can carry 2 or 3 payloads. By combining this with our antibody technologies, we aim to create highly differentiated ADCs that achieve a broader therapeutic window and enhanced efficacy. The third is Rani Therapeutics. The company possesses technologies enabling oral administration of biological products featuring painless drug delivery within the intestinal tracts, high drug delivery efficacy and bioavailability comparable to subcutaneous injections. By combining this, again, with our various antibody technologies, we also aim to realize biological products with high convenience through weekly or monthly oral administration with efficacy comparable to intravenous, subcutaneous injections. We will accelerate innovation by collaborating with partners possessing target discoveries and modality technologies that synergizes with our own. Now this slide shows market sales for major projects. Global sales are based on guidance from Roche or Galderma. There are no updates from previously disclosed figures. Within the domestic sales, the upper range section represents our in-house products, while the lower blue section represents Roche products. This slide shows the status of our portfolio across each modality. We continue to hold a robust pipeline of in-house developed projects, all progressing steadily. We're also pleased to announce that we have named our drug discovery technologies for midsized molecules, our third pillar of focus, SnipeTide. Snipe embodies the characteristics of our midsized molecules, high precision binding to intracellular targets via oral administration. Tide evokes the peptides that form the basis of this technology, while also expressing our aspiration for it to become a new trend in peptide drug discovery. We'll continue to focus on the continuous creation and development of our proprietary products or in-house products, including midsized molecule drugs to address unmet medical needs. Last but not least, our projected submissions. Projects marked with light blue stars are newly added ones. Projects marked with green stars have changed since the previous update. Specifically, for giredestrant, we are advancing the application for adjuvant therapy based on the lidERA study that I mentioned to this year. The following slides are attached as reference materials. That concludes my presentation. Thank you. Kae Miyata: Next, we will have from Taniguchi, presentation on FY 2025 consolidated financial overview. We will pause at the very beginning of the presentation. So those of you who wish to take a capture, please use this opportunity to do so. Iwaaki Taniguchi: Hello. I'm Taniguchi. I look forward to working with you today. I would like to describe the full FY 2025 consolidated financial review. As was mentioned by Dr. Okuda, I am pleased to report that cumulative revenue through the fourth quarter reached JPY 1,257.9 billion, up 7.5% year-on-year. Core operating profit also grew to JPY 623.2 billion, a 12.1% increase. Now I will provide details of these results. First, on the revenue. The pharmaceutical product sales rose to JPY 1,077.8 billion, an 8.0% increase year-on-year. By region, domestic sales were JPY 472.4 billion, up 2.5%. We had strong performance from new and mainstay products, effectively offsetting the impact of generic penetration and NHI price revisions. Overseas sales reached JPY 605.4 billion, up 12.8%, continuing to benefit from robust exports of mainstay products through Roche. Those are for product sales. Other revenues, including royalties here, increased by JPY 7.4 billion year-on-year to JPY 180.1 billion. While milestone income from third party declined compared to previous year, this was offset by an increase in Hemlibra royalties from Roche, resulting in an overall year-on-year gain. Turning to expenses. Cost of sales was JPY 351.5 billion, up 4.0% year-on-year. But if you look at the cost ratio, Actemra was relatively high, ratio has dropped slightly from previous year. So negative -- cost of sales ratio for pharmaceutical products improved by 1.3 percentage points to 32.6%. Regarding SG&A expenses, we successfully maintained these at JPY 103.2 billion, flat more or less year-on-year by driving efficiency to offset rising prices and labor costs. R&D expenses rose by JPY 3.2 billion to JPY 180.1 billion, primarily reflecting the impact of yen's depreciation. Other operating income saw a modest JPY 2.7 billion decrease, mainly due to lower gains from product transfers. As a result, operating profit rose by JPY 67.1 billion to JPY 623.2 billion, but the operating profit margin expanded 2 percentage points to 49.5%. Net income after taxes reached JPY 451.0 billion, a 13.6% increase. Next, on the changes from last year in pharmaceutical sales. Starting with domestic at the very bottom, domestic oncology sales were JPY 246.5 billion, a marginal decrease of 0.5% compared to the previous year. Specifically, steady growth in the new product, Phesgo more than offset the decline in Perjeta sales. Additionally, while Lunsumio is off to a strong start, Avastin sales declined due to generic competition. Specialty sales grew by 5.8% to JPY 255.8 billion. There was, yes, NHI price revisions, but in addition to mainstream products, Hemlibra, Actemra and Enspryng and Vabysmo alongside new products PiaSky, all delivered steady growth. Overseas pharmaceutical sales grew 12.8% to JPY 68.6 billion, primarily driven by strong exports of Hemlibra and Actemra. Next summarizes full year export status to Roche of Hemlibra and Actemra. First, Hemlibra. Fourth quarter sales, the final quarter. If you look at that compared to last year, rose by JPY 35.3 billion year-on-year. If you look at the full year cumulative sales, that reached approximately JPY 20 billion above our initial JPY 318.6 billion forecast. Actemra, since biosimilar penetration has been slower than expected, if you look at just the fourth quarter, we have seen -- well, leading to JPY 8.6 billion year-on-year increase on the fourth quarter. Consequently, for the entire year, Actemra forecast of JPY 123 billion was exceeded by approximately JPY 30 billion. So this was increased by about JPY 30 billion. Next, on the changes, this is like a factor analysis and changes in the operating profit. Starting with the Domestic segment on the left. As noted, there has been an impact of NHI price revision to drive higher operating profit. In the Overseas segment, the more we have sales in the emerging markets, the unit price will become lower. So volume growth significantly outweighed the impact of lower export unit prices, combined with favorable foreign exchange movements, these factors will keep contributing to the growth of operating profit. The revenue also contributed to the profit increase, primarily through higher Hemlibra royalties. This is the breakdown of the increased profitability of JPY 672.1 billion. On a quarterly basis, we are comparing P&L trends. Because of the export timing, there will be more ups and downs. If you focus more on the sales, this is by quarter changes. As you can see, the export to overseas, again, because of timing of the product, disease timing, there will be ups and down. Next is the FY 2025, how the outcome actually landed. So how much of a gap there was to what we have expected. As you can see, both the sales and the profit. And for each segment, we have exceeded the projection. So it was greater than 100%. For the expenses, there were some pluses, but it's been slightly lower. So that led to overachieving the operating profit. This is the byproduct sales as compared to the forecast at the beginning of the year. And the inventory situations have changed and there was slight negative, but everything else, like Actemra overseas, Hemlibra overseas and domestic. Overall, compared to our forecast, there was a positive number. Next page is the impact of foreign exchange rate fluctuations and the performance. The actual rate was JPY 161.2, including the forward contracts, which is the basis for the sales recording and JPY 173.57, so JPY 12.50 depreciation. So there was an impact in terms of revenue, JPY 49.6 billion plus and JPY 44.2 billion operating profit on the positive side. And this is the actual rate of pricing compared to the forecast rate. So 80% of the contracts are hedged in the previous year. So 20% are unhedged and use the actual rate, and there's change in exchange rate. So as a result, in 2025, there was a further depreciation of yen. So JPY 5.6 billion in sales and JPY 3.6 billion in plus for operating profit was recorded. And the balance sheet, JPY 2,468.6 billion, which is JPY 260.2 billion increase. There was a working capital increase and also net asset increase because of investments. And net assets increased by JPY 124.2 billion. Compared to total assets, there was a slight lower increase, but there was some interim payment of dividends and 82.1%, which is shareholders' equity ratio, which is over 80%. And here, you're talking about cash status. And last year, at the end of 2024, JPY 996.3 billion, but now there was a decrease of JPY 160.6 billion. And operating cash flow, JPY 452.1 billion, there was further positive size by income tax payment and dividend payments and JPY 170 billion for special dividend was included. So cash increase was slightly suppressed. In total, this shows the trends in ROIC and ROE indicators of capital efficiency. We have been focusing on ROIC so far. But depending on the company, the definitions of ROIC may vary. So in our case, the denominator doesn't include cash. So ROIC has been at the higher level, 43.9% for this year, which is 1 percentage point increase from year-on-year. And as for ROE, which is attracting more attention and definitions are actually universal from company to company for denominator and numerator and 22.1%, which is an increase from the year before. So this is ROE that is way exceeds the capital cost. And this is -- this fiscal's earnings forecast. As Okuda said, as for revenues, 6.9% increase to JPY 1,345 billion. Core operating profit to increase by 7.5% to JPY 670 billion. That is our forecast. Domestic sales are expected to grow despite the headwinds from drug price revisions and generic penetration. We're expecting JPY 25.6 billion growth because of new products growth, so 2.2% growth, which is exceeding the last year's growth. As for overseas exports for products for Hemlibra and NEMLUVIO, they are expected to increase, but there will be further marked impact from the biosimilars in Actemra. So there is JPY 3.4 billion, slight decrease is expected. But for the other revenues, JPY 64.9 billion increase is expected from the previous year, but there will be some foreign exchange impact. The cost side is not going to change that much. So there is going to be a support for profit growth. And this is the slide for the pure product sales aside from the other revenues. And Actemra is significantly negative and Avastin, for various reasons, will remain in the negative territory. But Lunsumio on the other hand, which is a new product, is expected to grow significantly. And Hemlibra overseas will remain on the growth trajectory. And this -- also, this is a core and noncore adjustment. So previously, the intangible asset impairment and also restructuring costs and ERP business foundation system introduction and restructuring costs. These are actually items for core and noncore adjustment items. But in the third quarter, there was also discontinuation of 5 development products that will be recorded. And this is the capital investments currently approved internally. And last page is just for your reference. We have attached details regarding the status of our 5 Chugai-originated global products. That concludes my presentation. Thank you for your attention. Kae Miyata: We will now move on to a Q&A session. We will also have Hidaka, who heads the sales and [indiscernible] who is also representing marketing and the sales to join. [Operator Instructions]. The content of the Q&A session will be uploaded later together with the presentation materials. We would like to take questions first from those in the room, in the venue, and then we will take questions by Zoom webinar. [Operator Instructions]. Kazuaki Hashiguchi: I would like to, first of all, ask about the Hemlibra. And you said that on the core base, this grew by double digit. And based on foreign currency denomination, I think it has also increased. But for this term, if you use that, it is negative, what are your thoughts about the volume as well as unit price? How will this change from last year? And for volume, I would like to know what your forecasts are for end user sales and the fluctuations in inventory in Russia. Unknown Executive: Thank you very much for the questions. For FY '26 on a whole, you are correct. We expect a positive number. But if we do elemental breakdown analysis at the point in time -- as for volume and the foreign exchange impact, we are not disclosing this at the moment. Now at the JPMorgan conference, they talked about the single-digit growth, so positive growth, which means that we would like to replenish the inventory through our export on a whole. Hemlibra guidance number has been as disclosed. Kazuaki Hashiguchi: The second question, in Dr. Okuda's presentation, auto-injector filing for Hemlibra has been mentioned several times. I believe that this is a very important agent in terms of competitiveness. When do you expect this to become available? Is it very close? Or do you still have some issues that needs to be resolved before that can take place? I would like to know more about the progress of this product. Unknown Executive: Thank you very much for asking about Hemlibra AI. We are moving along very steadily in terms of development. We are not disclosing the dates, but we would like to provide the Hemlibra AI to the patients as quickly as possible. So we are doing everything possible to move things forward. Unknown Executive: The person next to him please. Unknown Analyst: [ Yokoyama ] from [ Nikkei Medical ]. Giredestrant is what I like to ask about. So many companies are developing oral SERD drugs, but how do you look at the differentiation from competitors? The inavolisib is going to be a set of those, and this is going to be significant with the combination with inavolisib in breast cancer, but there is no schedule for filing for inavolisib. How do you see this? Unknown Executive: So giredestrant question. Thank you very much for your question, Yokoyama-san. Other SERD products comparison with those, as I said in the slide, in the in vitro test -- trial, giredestrant compared to other SERD oral product, proliferation suppression inhibitory activities were shown. And in the lidERA study, giredestrant and everolimus combination therapy compared to the conventional standard of care, ESR1 positive patients in addition to that population, ESR1 non-mutant population, there was a PFS that is statistically significantly achieved. So ESR -- regardless of ESR1 mutation, there was efficacy that was proven in the SERD oral product. So the CKD inhibitor -- previously treated with CDK inhibitor patients had a bad prognosis. So there's high hopes on that. And giredestrant and everolimus combination therapy, if you look at this, they are both oral drugs. So there is no injection to be required. So there's high convenience and 2 different signal pathways can be inhibited simultaneously. So compared to monotherapy, there is a higher antitumor effect expected and also adjuvant -- compared to endocrine therapy, standard of care at the interim analysis, primary endpoint was achieved. And for early breast cancer as a new endocrine therapy, this is the first one in the last 20 years, new benefit was brought about. So this could become an adjuvant standard of care. So there's a high hope. And more than 70% of early breast cancer is the target for this study. So we are hoping that giredestrant can contribute to many patients. And as for inavolisib, there is one study with a combination with inavolisib by Roche. But at the moment, the combination of giredestrant and inavolisib, there's no plan for a study with that. Unknown Analyst: But with the study of giredestrant and everolimus, what sort of strategy can work out will be something that we work with Roche. So that's not my question. ESR can be covered, but CDK4 and 6 has to be suppressed. But -- there's studies overseas, but Japan has not participated, but Phase II study will be done in Japan, and there will be a bridging study. And then at that timing, the inavolisib can be used for the oral SERD study. So when will it be? Unknown Executive: As for inavolisib, as you said, Phase I study is now underway, and there will be bridging with overseas study data to file for approval. But at this moment, I'm sorry, but we're not in a position to disclose that timing. Unknown Analyst: So for the timing of filing has not been disclosed. And what you filed for yesterday, the bladder cancer, MRD-positive patients. So for all comers, nivo can be used and [indiscernible] has been presented as part of the data. And so to other -- compared to other products, what will be the superiority of this drug? Unknown Executive: I'm not sure who this is addressed to. So Tecentriq adjuvant, the muscular invasive bladder cancer. Thank you for your question. And compared to PFS, in OS, the primary and secondary endpoint, there was a statistically significant benefit that was proven. And in the CDR monitoring, the atezolizumab or we can identify patients that can benefit from atezolizumab. There could be avoidance of overtreatment or personalized medicine can be done with the CDR approach. So the patients with lower risk can avoid overtreatment. That will be the benefit. Unknown Executive: We now would like to invite questions who are joining us through Zoom webinar. [Operator Instructions]. From JPMorgan, Wakao-san, please. Seiji Wakao: Wakao with JPMorgan. The first question -- first of my questions is related to the royalty other than coming from Roche and also other revenues. Royalty from other than Roche is both for orforglipron and nemolizumab sales or increase thereof, I believe, am I right? If that is the case, orforglipron has not been approved. So I would like to know how you are incorporating that. And we also expect the sales to grow considerably. I would like to have you comment on this. Iwaaki Taniguchi: This is Taniguchi speaking. Thank you Wakao-san. Revenue stream from other than Roche, yes, is expanding in '26. And you are absolutely right in your understanding. Vast majority comes from those 2 product royalties. That's true. But other sales revenue, in general terms, this is like milestone payment. Seiji Wakao: Now as for the content, this still is not disclosed, including what we are filing today, we have introduced several assumptions and have reflected in what we are saying. I would like you to tell us about how you incorporate the orforglipron. I think because the product is not out there, you must be exercising conservatism? Unknown Executive: Yes, for anything that is uncertain, our basic thinking is to make sure that we will use reasonable assumptions. Seiji Wakao: Second question is about 45% dividend payout ratio. The operating profit in the mid- to long term will lead to greater profit and you are focused more on ROE, which means that at some point in time in the future, you will raise payout ratio. There are no reasons for you not to. Are you discussing this internally of raising the payout ratio to above 45%? And if you have decided no, why? Unknown Executive: Thank you Wakao-san for that question. We have provided last year at this timing, our capital allocation policies, and we wanted to target 40% stably. And so dividend payment included is based on that. For the time being, we have no plans of revising or reviewing this. And I'm sure you understand that. Now the question is, will we ever consider revisiting? Are we not going to revise this ever? Well, we cannot say anything definitive at this point in time. We'll be looking at the objectively our situation as well as our financial conditions. Now ROE, yes, we are looking at our cost of capital, and we have disclosed this, we consider to be about 7%, which means that our ROE is well above that. So it's not that we are going to make active adjustment of the capital. We don't think that we are at the situation where we need to boost ROE today. In any case, we should continue to maintain and try to strive for improvement of capital efficiency. Kae Miyata: Muraoka-san, MUFJ Securities. Mr. Muraoka, please. Shinichiro Muraoka: I'm Muraoka from Morgan Stanley. My question is also addressed to Taniguchi-san for the forecast or guidance for a more detailed way of interpretation. The Slide 7, the forecast by product. So overseas and others, there will be an increase of JPY 70 billion, which is significant. And NEMLUVIO export will probably the biggest contributor. And if that's the case, then the royalties from entities other than Roche, the increase of JPY 730 billion compared to NEMLUVIO also would be larger. That's our guess. Is that something that is valid? Iwaaki Taniguchi: Thank you very much for your question, Taniguchi speaking. For the breakdown of royalties for the portions that are not from Roche, those 2 that you mentioned is overwhelmingly important. That's what I can tell you. But as for the allocation between these 2, at the moment, we cannot answer that question. So also orforglipron, it has not been launched yet. And you have to look at the timing of launch, which is quite difficult discussion. So we remain undisclosed for the allocation. As for exports. As for NEMLUVIO exports, so this was recorded in the previous fiscal year. But for this fiscal year, we still continue to expect growth, and that has been incorporated in our guidance that we provided at this time. Does that answer your question? Shinichiro Muraoka: So overseas others, JPY 32.6 billion, JPY 17 billion year-on-year, it is mostly from NEMLUVIO. Iwaaki Taniguchi: Yes. Shinichiro Muraoka: And also the breakdown of this Page 7, the domestic and specialties and others sales, JPY 33.3 billion year-on-year growth of JPY 12 billion. Tamiflu is not going to grow. So what's included in this number? Earlier, you talked about P&L cost of goods -- cost of sales ratio that is assumed to increase. So maybe the products that are included here have higher cost of sales. So those that are not in the pipeline, but there is something that you are going to start to sell. That's my personal guess, but am I wrong? Iwaaki Taniguchi: For the cost of sales ratio, compared to '25, in 2026, there's a positive growth. The background, there is a lot of factors. But if you compare domestic and overseas sales, the cost of sales ratio is much higher in domestic products. So this is related to products. So overseas, there's JPY 3.4 billion decline, but JPY 20 billion increase for domestic sales. So domestic product ratio has increased, and that has brought up the cost of sales overall. As for more details, it is not disclosed, but you mentioned Tamiflu. There are various factors involved, products that are not mentioned and that are expected to grow this year that are included in others. Shinichiro Muraoka: So that those are expected to grow are not in the pipeline or the filing schedule on Page 39. Those are not included in those schedules? Iwaaki Taniguchi: No, no, no. That's not the case. There are some that are included. So -- but all that are expected to be filed are anticancer drugs. Shinji Hidaka: Well, Hidaka from sales speaking. As you said, there's still uncertainty, a lot of uncertainty. But Elevidys, gene therapy sales are incorporated to some extent. And maybe that would satisfy your question. Kae Miyata: Next, from Citigroup, Yamaguchi-san, please. Hidemaru Yamaguchi: Yes. At the very beginning about the update of midterm business plan. You talked about the production efficiency of blockbusters have improved from 0.3 to 0.6. My understanding, of course, is you are aiming for 1. Although there are different risks based on current pipeline, do you think that you are achieving what you can achieve? So what are your thoughts about this 0.6 vis-a-vis 2026 and 2030? Osamu Okuda: This is Okuda speaking. Thank you, Yamaguchi-san, for your questions. So you're looking at this slide, right? Looking back, in the 2000s, it was 0.1. So 1 per 20. In the 2010, it tripled. And in the 5 years since we began the Strategy 2030, we have actually launched 3. You talked about, Yamaguchi-san, blockbusters, but this is about global in-house original product being successfully developed and launched. We are focused on antibody plus a small molecule that we have achieved launch targets between 2026 through to 2030. So in the latter half of TOP I 2030, our strategy is to further increase this. As we talk about midsized molecule, middle molecule, the white will gradually become more purple. If we succeed beyond 2031, this could become like 1 every year or greater global launch that will further drive growth or even better than that. Hidemaru Yamaguchi: With increased modality, there's this growth will increase because of the midsized module. Unknown Executive: Yes, we will look at antibody, small molecule, mid-molecule and our imbalance. And we're talking about other modalities. We were discussing this in the TOP I 2030 strategy discussion. We hope to achieve multi-modalities. So we want to increase that. Hidemaru Yamaguchi: The other question is giredestrant, which you have explained in length, and we have high expectations. What is your peak sales forecast? Or is it too early? Unknown Executive: Well, thank you for that question. For giredestrant, we are not disclosing that. Hidemaru Yamaguchi: What would be the TAM in Japan? So the targeted market size. Number of patients or the existing market size is probably quite large, but I would like to know which segment you are targeting? If you don't have that information, if you could provide information later? Unknown Executive: Yes, we would like to confirm and get back to you. Kae Miyata: From Macquarie Capital, Mr. Tony Ren, please. Tony Ren: The first question I would like to ask is about your CapEx. You commented on the Araris partnership for ADCs, right? My understanding is that the CapEx can be very intensive for ADCs. In fact, one of your peer companies recently announced a very large CapEx project for their ADCs. So I just wanted to see how are you thinking about the CapEx related to the ADC drugs? Are you building the production capacity internally? Are you using CDMOs? Are you using facilities from Roche? Is this included in your CapEx budget for 2026? So that's my first question. Iwaaki Taniguchi: Thank you very much for your question, Mr. Tony Ren. As for the CapEx, for the current status, Araris and Chugai Pharmaceutical are now engaged in joint research. So we haven't discussed the CapEx. We just engaged in joint research. Therefore, as for the 2026 in the CapEx budget, this was not included. Tony Ren: Okay. Very good. My second question is on the development of your GYM329/emugrobart in obesity. So the [indiscernible] Phase II trial of emugrobart in obesity. If we look at the clinicaltrials.gov, the primary completion is August 2026. Can you confirm that you will be releasing Phase II results roughly around that time as well? Unknown Executive: GYM329 Phase II trial. Thank you very much for your question on that. So at the outset, as I said in the presentation, the result of the clinical study is going to be released by the end of this fiscal year. Kae Miyata: [indiscernible] from UBS Securities, we have [indiscernible]. Unknown Analyst: I'm [indiscernible] with UBS. We congratulate you on an excellent performance. In other revenues, this royalty or milestone is -- it includes something -- some items that are outside of Chugai's control. If the actual revenue, other revenue, does that meet your target? What are some avenues that will change or don't we need to worry about this because you are being very conservative? Iwaaki Taniguchi: Thank you very much [indiscernible], I am Taniguchi. The latter, we have exercised conservatism. But if it is so unexpected happen, we cannot negate the possibility that something will happen outside this. But how this will be absorbed within the entire portfolio? This is something that we will be communicating to you in the quarterly earnings call. So we will keep you appraised or updated within the project planning. Unknown Analyst: The second question has to do with biological POC of DONQ52. And I would like you to supplement my understanding. What does this mean? In Phase I study like PBMC, like peripheral blood monocytes? Or are you looking at that kind of response at the cellular level? Unknown Executive: Thank you very much for that question about the DONQ52. We have conducted what we call Phase IC study. This is celiac disease patients who are stable after administering DONQ52 in such patients for 3 days, we challenge them with [indiscernible]. And gluten-dependent immune response is what we are trying to induce. And then we give DONQ52 to see if gluten-dependent immune response can be suppressed. In this study, in addition to PK, we'll be looking at pharmacological action. T-cell activation suppression due to gluten ingestion is also looked into as well as other biomarkers. Unknown Analyst: What was the outcome of the 3-day challenge study? Unknown Executive: We are now in the process of analyzing this. And when we are ready to publish data, we would like to do so. Kae Miyata: Next, from SMBC Nikko Securities, Mr. Wada, please. Hiroshi Wada: Wada from SMBC Nikko Securities. So I'd like to also ask about DONQ52. So licensing out schedule, how do you look at that schedule and development. As you saw, Phase II study is going to be initiated. So as I heard, this is going to be licensed out to other companies. I think that is the main strategy. Maybe it would be the Phase II timing that you're going to do that. But this is going to be -- Phase II is going to be performed by your own company on your own. So what will be the timing of Phase II as you see it? Unknown Executive: So Wada-san, thank you very much for your question on DONQ52. For licensing out strategy and timing of individual products, we cannot answer those questions. But the Phase II study that we announced this time would be performed by Chugai Pharmaceutical. Just for clarification. So in the Roche pipeline, this is in Phase I. Hiroshi Wada: So you're not aligned with Roche on this particular product. Is that correct? Unknown Executive: Probably. This is not described in the Roche material or pipeline. We don't have the information that they have introduced this. So in the Roche pipeline, Chugai's projects are also described, but this is -- this doesn't show that they have licensed in our product. As Yamaguchi-san asked Page 15, TOP I 2030, 1 per year global product launch that is target. And I'd like to ask about the strategy of research and development. So from 2011 to 2020, 0.3 per year, but '21 to '25 0.6 per year, it has doubled. But R&D around 2015, JPY 80 billion was spent. And in '23, JPY 160 billion. So this was doubled as well. Hiroshi Wada: So that's why the number of launches has been increased. I understand that. But between now and 2030, if you are to launch 1 per year, then 1.5x R&D expenses will be required. So in order to achieve on 1 launch per year, what is your expectation on the R&D expenses or spending? Unknown Executive: Okuda will answer that question first. And then for the future R&D investments, I would like to ask Taniguchi to answer the question. Osamu Okuda: So the R&D expenses and number of launches, whether they are correlated or linked, it's not necessarily the case. So the number of launches, what would be the function of this? So R&D -- aside from R&D, but the cycle time of development, the speed of development and probability of success, those will be significant factors. So there is a time line between R&D activities and launch of the products. So there is not that simple correlation. So as a principle for R&D activities, high-quality products have to be developed. So this has been the case in the past, but with a higher probability of success, we came up with the molecule in the Phase III development. The first indication has achieved 100% success probability. So that quality principle has to be maintained or expanded while engaged in this drug development. So R&D expenses and number of launches are not directly related necessary. But on the other hand, if you look at R&D expenses, it includes the personnel cost, and this is a very important resources to drive research. So this R&D expenses have been increased in accordance with the profit increase. So I'd like to ask Taniguchi to add up. Iwaaki Taniguchi: Compared to 2025, 5.5% increase was recorded. That was a fact. But as Okuda said -- so the productivity increase is something that we give priority and that is also true for R&D by utilizing AI and go or no-go decision will be further refined. So we are hoping to enhance productivity. So it doesn't necessarily mean that R&D expenses are going to keep going up rapidly. And the target for percentage of R&D expenses, there is no such figure that we have in mind. But as the projects make progress, there could be increase in development expenses. That could be the one that we might end up with, but we're also keeping an eye on productivity and efficiency so that we can maximize our efforts. Kae Miyata: Next from Bernstein, Sogi-san, please. Miki Sogi: About Hemlibra. I have two questions. The first question is related to overseas sales. This time in 2026, the assumption on Swiss franc, I mean, you are expecting 6% depreciation of the yen. If that is your assumption, Hemlibra, I understand the plan is to decrease. Of course, sales in the international market, I mean, by Roche or by Hemlibra going up, you said will lead to lower unit price. Even if the volume increases, the lower unit price will have greater effect. So you're selling more, but is it possible that the yen amount exports come down? Is that possible? Iwaaki Taniguchi: Thank you very much, Sogi-san, this is Taniguchi speaking. Hemlibra forecast for this year, and you're asking about the breakdown, which, of course, is related to unit price, volume and foreign exchange factors. I would like to keep from giving you any responses in detail, but it is true that there has been a foreign exchange effect, positive. What about the net of that? Then we have the unit price multiple wide by volume. Unit price actually has to do with the weighted average in the market previous year applied. So we will be looking at market price and that sort of decides what the export price is going to be. Volume is something that's updated every term in emerging markets, not just the emerging markets, but it is possible that volume increase globally. This has happened in the past. So there's no reason to think that this will not happen in the future. And that multiplied by unit price will give us the results. Miki Sogi: Also about Hemlibra. And this is related to auto-injector. By launching this, what level of upside do you expect? Hemlibra, I believe, has penetrated the market. Uptake has been great. So who are the patients that have not been able to capture without the auto-injector? And I also would like to understand what Roche has in mind related to this. Unknown Executive: Well, I would like to respond. Auto-injector development for Hemlibra, we have been striving with the aim of raising convenience of our patients. If we have auto-injector of Hemlibra, we expect the uptake to increase, but [indiscernible] competition could come up with a very convenient device. So please do understand that we are being defensive -- we're taking a defensive approach to that, too. Kae Miyata: Because of time, we would like to take one last question from Goldman Sachs, we have Ueda-san. Akinori Ueda: Ueda from Goldman Sachs securities. The first question is about the U.S. partnering office that has been launched. So at the moment, in the previous activities, what were the challenges that you faced to trigger this? And what kind of effects that you're expecting out of this initiative? Unknown Executive: Thank you for the question. Well, as for U.S. partnering office, this is located in South San Francisco and the West Coast, and it just started operation. So in Silicon Valley, there are many bioventures and universities in the U.S. There are numerous universities located there. And of course, we can keep communication from Japan, but by physically locating in the area, bioventures and academia and venture capitals, we will have closer communication with those parties so that we can achieve open innovation. The drug discovery capabilities increase is the primary purpose, but there will be effective results that we can expect. So that's why we've decided to locate our office in West Coast or South San Francisco. But ahead of this, there was a corporate venture capital that was established in 2023 in Boston, and it's been already 2 years since the start of the operation. And we went into venture communities and from venture companies or start-up companies, there was a lot of information that we received. So as the technology reaches maturity, we could have a joint collaboration with those, and there's a link there as well. But it's not just in the U.S., but in Singapore, there is a similar function. And there's also a partnering function in London and Chugai headquarters, Tokyo headquarters, has this function. So by establishing a global partnering network, we are hoping to increase our drug discovery capabilities. That's our intention. Kae Miyata: Thank you very much. With that, we would like to conclude Chugai Pharmaceutical fiscal year 2025 financial results presentation. We apologize for the difficulty that you experienced at the first half of the presentation. We will provide backup information via web. If there are any questions that you were not able to ask, please do contact us at the corporate IR. The phone number as well as mail address is shown on the last page of the presentation material. Thank you very much once again for joining us, taking time out of your various schedules.
Henrik Høye: All right. Welcome to presentation of Protector's full year '25 results. We will focus on the full year. The quarter is volatile. We say that all the time, focus on the full year result that is more interesting and says more about the underlying realities of the business. And before I go into the results, I always spend a little bit of time on who we are. And what we did this morning was to continue on looking at what the challenger should be in the future. And one thing that we care about is that we -- even when we are 700 people, even when we grow in a number of countries that we still act as one team, which is a bit contradictory to a performance culture where we compete against each other and also that we want local decisions and also that we want each individual in the company to make decisions because they are where it happens and they should know what decisions to make. So that's what the challenger is. It is about making everything we do, focused and simplistic. But when it comes to culture, we need to complicate it in order to spend time and really understand. So that we're on the same platform and the same grounds for the future because I think that's extremely important in order to stay who we are, the challenger. And then to the highlights, other than that 84.7% combined ratio and a 14% growth with an investment result of a return of NOK 1.5 billion, leading to NOK 31.7 per share in earnings. We have had some other activities in the quarter, one being the placement of the Tier 1 debt where -- bond where the market was good, so with good terms on that. Maybe the biggest other than the growth for 1st of January, which I come back to. News is that we have now been relieved of the maybe biggest mistake that we've made in Protector workers' compensation in Denmark, where we took on board a portfolio knowing that we didn't have the exact data we needed to underwrite it, but we underestimated the downside of that portfolio. And we have now sold that. So the agreement with DARAG is completed, and we can now focus on the lines of business and the business that we know how to do in Denmark. So that's very good. I'll get back to the reinsurance side and the growth later on. And speaking about the growth, I think that it is important, in particular, following the 1st of January with high growth. It's important to remember how the portfolio is put together. And what we see here is a development. The development is driven by disciplined underwriting. So we underwrite in all these segments. And remember that the commercial segments, so if you look at the segment distribution on the left of the cake diagrams here. Commercial sector in all countries is bigger than the public and housing sectors. And -- but we have grown more in the public sector. That is due to mostly market conditions being -- it's been more rational pricing in the public and housing sectors than what it has been in the commercial sector. So that's why public sector and housing has grown a lot also in the past 5-year period. And property and motor, by far, our biggest product, short-tail products. And U.K. is now close to half the business or at least 42% of the business. But it's also important to remember that the 1st of January growth is related to the Scandinavian markets or the Nordic markets and France, not U.K. And the market conditions are different in those two geographies. So it's been easier to grow in the Nordics and France than what it has been in the U.K. in the past year. So it's just a support so that you see what the inception structure in our portfolio was in the years from '21 to '25. Obviously, we don't know exactly how that will look in '26, but at least you then see that distribution. And when it comes to '25, what you have seen throughout the year is that from the U.K., we've had a good 1st of April in public sector and housing, but we -- I've also said and we've also experienced that the market has been softening. So rates have been going down, especially on the product -- the property product in commercial sector. So it is slightly harder to achieve price increases. It's slightly harder to renew clients and also to get new sales. But the churn in the U.K. during 2025 has been good. So we've managed to keep the churn at a good level around slightly above 10% and been disciplined in the new sales side. And then we've had strong growth in the other territories or in Scandinavia. And that is supported by good renewals, renewal rate of 95% in total for the company, it's basically the same in the Nordics. And -- but we've also had some new sales. So the markets there are -- it's good on the Norwegian business, which has the highest growth out of the Scandinavian countries on 1st of January '26. So a similar situation to what you see here. Denmark is #2 1st of January '26, but Sweden has a lower growth in '26. So Sweden is a market where there is still more competition and more competition that we view as irrational. And then you have the French business, of course, where not a lot happens in quarter 4. So most of it is old news of the start there. However, 1st of January is an interesting date because we communicated an estimated number of what we thought we would quote for 1st of January following quarter 3. And -- that number was roughly right. So what we have seen in the market for 1st of Jan in France is that we have won approximately 10% of what we have quoted in the commercial sector space, motor. And that's a lower figure than what we are used to in Scandinavia. It's more in line with what we are used to on the motor side in the U.K. And then on the housing sector, where most of the property volume from '25 comes from, we have basically won nothing 1st of January '26. So one of the big competitors, AXA has come in and lowered prices a lot compared to what they did in '25. So it's not a hat trick in France. We have not won volume in all the segments we're in, but we've got some traction on the municipality side, the public sector side, where the market situation is very different from the housing sector. And the interesting thing is that the housing sector is quite similar to what we know in the U.K., where there is low deductibles, lots of escape of water claims and calculating the price is not very difficult. So when we may make a mistake and the competitors that price lower than us, they may know something we don't. Absolutely, it's new. We're new in France. But at the same time, it's difficult to see that it's very sustainable those levels that we see in the housing sector now. So at some point, we believe that we can have success there as well. Maybe not in the same way as '23 in the U.K., but at least it's not on the public sector side, which is more about large loss and risk selection. Unknown Analyst: There are a lot of questions along the presentation. Henrik Høye: Sorry, I forgot to say that. So please ask questions during the presentation. Unknown Analyst: [indiscernible] France, after quarter 3, you said that -- at that time -- have been seeing around EUR 300 million in potential volume. And that your effective quotation rate would be around 70 to 75 [indiscernible] So approximately where [indiscernible] Henrik Høye: So it continued to grow, not a lot from that, but the quotation rate went slightly down, both because of capacity -- our own capacity. So we prepared as well as we could, but we didn't have enough manpower to do that with quality. So the actual number is very similar to what you could derive out of the 370 to 375... Any more questions on volume side? And please ask questions in writing as well. Okay. Again, when we look at the full year, we also bring out the longer picture here, and there is volatility in not only the runoff and the large losses, but also on the loss ratio below those large losses and without the runoff. The large loss situation in 2025 is lower than what we had said is normalized. And the comment on the top here going from 7% to 8%, I'll get back to when I speak about the reinsurance, but that goes for '26, not for '25. So for '25, it's still a normalized level at 7% approximately. So we're slightly lower than a normalized level in '25 and had some run-off gains, even though it's best estimate, but I've also said previously that following a period with uncertain inflation, you should expect that we -- that there is a bit more uncertainty and then there could be some runoff gains from that situation if we have been on the conservative side. And then when it comes to claims, I think the important message here is to say that if we compare full year '25 to full year '24, and you normalize for runoff and large losses, all countries are slightly better on the loss ratio side. So it's an improvement coming from the price increases where we have unprofitable products or clients. And that's the simple way of seeing it. The only country that is slightly up, but very much the same is Sweden. And then there are some technicalities, one of which is on the -- or related to the transfer of the Danish Workers' Comp portfolio. So the risk margin is reduced. It's a one-off of approximately NOK 80 million for the quarter and the year due to lower risk in the remaining portfolio, have changed that model. And then there is a small -- between the countries, it has nothing to -- or no consequence on the total loss ratio. But between the countries, there is -- we've changed from a standard, very old model of calculating the future claims handling costs and that changes the distribution with slightly lower cost, which is claims handling cost is on a loss ratio for U.K. So U.K. is slightly higher and then Norway and Sweden have had a bit more of that cost, and that's a one-off again. So they're slightly lower. And with that information, it's -- the conclusion is that all countries compared to '24 are slightly better, normalized for all of that. Any questions on the loss development side? You have all the figures on large loss in order to normalize on all these levels. So I won't go through each of them, but that's the total picture. So we have cost and quality leadership leading to profitable growth as our targets. The cost side is very flat. There is no or very limited efficiency improvements in what you see here. There are some effects that make this look -- '25 look higher than '24. But if you correct for the fact that the share price has increased, we've talked about that before, more than what it did in '24, and that is connected to incentive-based share program for some employees and France, then you'll get slightly lower than what we had in '24 on the cost side. But there is no or very limited efficiency improvement. And we do that consciously. But of course, we do want to see the effects of that investment we make. I think it's more likely that we see that effect in new opportunities for growth that we spend it on developing the company in -- on the growth side to grow then that we cut and slim down departments very quickly in order to get the low cost. And that takes some time, as you understand. So I think that there is no -- nothing very special to comment on here other than those comments I've already had, unless you have any questions on specific countries or the totality on cost. Now continue to the quality leadership. And last time we brought this up, we had the U.K. survey with the brokers where we got very strong feedback. We've also had the Scandinavian or the Nordic surveys out and had very strong feedback. And it's especially good to see that we are increasing the distance to our competitors in all the Scandinavian countries. And we are also winning more prices, external prices from the brokers. So the largest broker in Scandinavia. We are #1 in Sweden and in Norway. And we've also won other external surveys that support our own survey. But at the same time, and as always, the most important thing about this survey is to understand that feedback, use it as a basis to discuss with the brokers who are our best and only friends, how we can improve, what we should prioritize to improve in the future. So this is good news. It doesn't automatically mean that we will get more business from the brokers, but it means that we can -- we're in a position to require more from our best and only friends. And I think that's the important part that the long-term gain from this is that we can require better data, more data, we can require that they invest together with us in competing against the direct channels and that we can do those larger projects because we -- you say that we are the best partner for you. So that's a good thing, but it doesn't mean that we win more clients tomorrow. Yes, there is basically nothing I haven't touched upon here since we've talked about the cost previously as well. So I'll move forward to the investment side. And -- yes, when you see this, it's per 31st of December and does not then include the reduction from the transfer of the workers' comp agreement, which is for '26, and it does not include new growth, of course. So that's a change. But the results on the investment side are strong in absolute terms and relative, especially on the equity side, but also on the bond side in a very strong market. And the yield is down due to the reference rate, if you compare it to last year. Other than that, on the bond side, it's very similar portfolio. We steer interest rate towards our liabilities, and we have a slightly shorter duration in our reserves. So that's down. And then you see the comment at the end that we have the assets under management are reduced by the transaction amount of the reserves that we had on the Danish workers' comp portfolio, approximately NOK 1 billion. And on the equity side, I think it's right to say that it's both absolute and relatively strong result. There is some changes in the portfolio. You see that the discount to intrinsic value has reduced significantly from last year. Some of it is obviously that we've had the gain that we had. So the share prices have gone up, but there are also some companies or some sectors that have performed worse than what we have expected. So there have been some changes in the intrinsic value. So we're open as a value. So -- and this year, it has been some disappointments on certain segments and companies and some changes in that portfolio. But even though it's the same number of holdings, there have been some changes in the portfolio during 2025. And you'll see that in the annual report what we had at year-end '25. Any questions to the investment side? Microphone? Unknown Analyst: You managed to earn an annual rate of return on investments of like 14% over the last 10 years, which you saw on the last slide. How did you do that? And are you going to keep on doing it? Or is it going to be another number in the next 10 years? Henrik Høye: So Dag Marius is here and he's in charge of that, but I can answer that question in at least a simple way, and that is that we believe in what we're doing, and we will continue believing in doing that. So investment is core business for Protector as insurance is. And we will continue to step-by-step have improvements in our processes. And -- but what the future will give, that's very difficult to say. Our ambition is to beat the market over time. And we think that those processes are set to do so. So unless Dag Marius has anything to add. On the income statement here, we have a couple of comments. And I've touched upon one of them before, the change in risk adjustment, it's an IFRS element. So it's on top of the best estimate reserves. There is a risk adjustment in IFRS. And when a long-tailed reserve portfolio is out of our portfolio, then the risk in total for the rest of the portfolio is lower. So that's why we've made that change. It's a one-off, and it should be a stable number or fairly stable number in the future, depending on where the growth comes from. And then it's the larger change that we've made on reinsurance. And it's a bit complicated just because there are no figures that will exactly clarify what has happened on the reinsurance side in the accounts. But to make it simple, we see it from two sides. So I said that we increased the large loss -- normalized large loss rates by 1 percentage point from 7% to approximately 8%. So we're taking a bit more risk ourselves, buying less reinsurance on certain programs. I'll get back to that. And then on the other side, we pay less for that reinsurance. And we wouldn't have done that if we didn't think it was a good idea. And we've done that on the areas where we have a lot of data, so where we think that we're actually able to predict what those large losses will be over time. So that's -- so one angle is that we have increased risk, and that's -- that will mean that -- so it's the very large losses. And as you've seen over the last 5 years, our large loss rate is lower than 7%. And so these are the very large losses. So it's not something that will happen every year. It's -- this is a volatile element. It's a volatile part. It's long -- far out on the tail that 1 percentage point that we're speaking about. And then the reduction in cost is then higher than what that increase is. On the capital development side, on the own funds, we have the Tier 1 that we issued. And then as we're growing, we utilize more of the Tier 2 capital that we have issued previously. And then that's basically the same amount as the dividends that will be paid. So that's stable. And then on the requirement side, it's on the insurance side that there is a change and it's related to reinsurance. And that's the other angle to that reinsurance exercise that we -- so it's increased approximately NOK 300 million on the requirement side. And when we do that, and we have a target or a requirement of 20% return on that capital we need to hold for NOK 300 million insurance risk, which is higher than NOK 300 million, of course. Then our view is that has to be that it's much higher or higher than 20% return on that equity. And our estimation is that it is much higher than that. If not, we wouldn't have done it. So what we have done is to say that on what we call risk -- the risk program, that's basically fires that can be that large on the risk program. We have increased from 100 million Scandinavian kroners or 10 million pounds or euros to NOK 330 (sic) [ 300 ] million. And that's because we have very solid data sets to document and to calculate losses between or up to NOK 300 million and the price is too high. So let's not buy it. We can take that volatility. But obviously, there will be slightly more volatility in our results. But the economic realities of it is that it's the right thing to do. The cat is different. So natural catastrophes, that's different. Just like predicting the interest rate, I don't think we should believe that we are best in the world at predicting what the weather will look like and what climate changes will do. So to increase too much on that side, obviously, we have a view of both how we select risks when it comes to natural catastrophes. We have processes and data that aim to avoid the worst ones where there will be the most flood or the most windstorm damage. But to predict the consequence of weather-related damage to our portfolio is difficult. So we have increased retention on the traditional program to the same level or actually higher since it is in Danish kroner as on the risk side, but that's only for the first loss, then we bought more reinsurance that reduces that to DKK 100 million on the second loss. And the reason is basically that we don't think we know exactly how to calculate that. On the U.K. liability, it's just a too high price. So we -- then we say that you pay this price or we take it ourselves to the reinsurers and some wanted to pay that price or take that price and some didn't. So then we took a higher share of the layer between GBP 10 million and GBP 25 million on U.K. liability. And we are much more comfortable with that portfolio today than what we were when we entered the U.K. So that's -- yes. Any questions on the reinsurance side? Unknown Analyst: Henrik, one, I think that what you're doing sounds reasonable, absolutely, so we like it. What's your estimated or guesstimated increase in retention rate after this one? Because when we do our calculation, we end up that you estimate a large loss ratio to go up from 7% to 8%. And our estimation is that the retention rate will increase with around 2.0 percentage points. Is that a fair assumption, would you say? Henrik Høye: Yes, I think that's a fair assumption. And obviously, it depends on how the portfolio develops. But with the '25 portfolio, it's a fair assumption. Distribution policy, it is very similar to what we have had previously. What you do see is for the one who has studied it next to each other is that it is -- the arrow is slightly taller. The green starts slightly higher up and the box -- the blue box above 200 is slightly higher than the one below. And that is to reflect the process that we have where it's not really about these numbers, 200% or 150% is important. That's the bottom and then there are activities. But it's about the risks that we look at and evaluate every quarter on the different areas, mainly the insurance side and the investment side, but all the underlying risks from them and then the stress scenarios and what we have in a stress situation because what we always want to be sure of is that we are ready to act on profitable growth and good investment opportunities in a crisis situation, but at the same time, not to get lazy, obviously, and make sure that we don't think that we can make a lot more than you if we don't see those opportunities right in front of us. But that's -- it's a quarterly process or a continuous process with a quarterly decision, and it is -- it happens after we know what the results are, not before. Our long-term financial targets, no change in them. And it may seem a bit conservative to say 91% combined ratio with the history of the past 5 years. And the underlying realities is, when I say that they look good and we deliver 85%, they still look good. So -- but it is something about the growth -- Protector as the growth company. We -- profitability is extremely important, but we also have to face the fact that in order to find new markets, there is a bit more uncertainty and we need -- price is the deciding factor. So 91% is long term, a very good return on equity and the same there, conservative relative to those numbers, but I think that it is a good steering to have. And then we're back to the summary and any questions on the totality or the last part? Unknown Analyst: My name is [indiscernible]. I have a question, if I remember correctly, at the last quarterly presentation, you talked about the possibility of entering a new market in the U.K. within real estate. Could you say something about -- are you quoting for the 1st of April already? Or is it too soon? And could you say something about your volume expectations in this market? Henrik Høye: Yes. Good question. I should probably have said something about it on the volume side. So it's -- we have quoted very selectively so far in the real estate market. We have won a handful of clients in that market. But the selectiveness is due to the fact that we basically only quote what looks like what we have from before, housing, for instance, in the real estate sector. And in that part of the real estate segment and especially for the large clients, it seems like the rates are a bit too low. So we haven't won many of the larger clients there yet. But we have quoted very little so far, so that it's a bit unsure if the market intelligence is significant. But we're building those databases with data from the brokers. We're actually getting large databases from the brokers. And when we have a more granular model that can separate the different types of risks within real estate, we are very ready to make that a quoting machine. So we have -- there, we have the model, the people and the setup. So we're feeding that with data. And then we've said that it's approximately GBP 1 billion in that market for what we have risk appetite for. And over time, and I don't know what that is. I'd say it could be 3 years. If things -- if it's a hard market and a rational market, it could be 7 years if it's a bit up and down. But we should have a large share of that market, meaning at least double-digit percent or higher than that is quite obvious because there is a lot of attritional losses and cost will matter in that segment. It's very similar to what we do. So nothing in the figures for now. No good understanding of the market situation, but we're preparing, still preparing. 1st of April is not necessarily a very large date. It's more spread out on the real estate sector. Thomas Svendsen: Thomas Svendsen from SEB. So a question to your U.K. business, just to help us to try to calculate sort of the trajectory of the combined ratio there. So the business you have today, that's the back book and then you have the front book. So how many years do you think it will take before you have replaced the favorable business with the new maybe softer business? Henrik Høye: So it's -- I've commented on this before, and we haven't changed the view on it other than that -- the parts of the portfolio that should be out in 1st of April '26 is going to be smaller than what we estimated. So it's not coming out for tender. But basically, what you can say is that for all the business we wrote in '23, which is the big inflow as 1st of April '23. It will be some clients with -- then 3 years, but I'm saying that that's a smaller share than what is the normal. And then some clients with a 4-year before they go to market. And then -- so let's say that it's approximately, I think I said that before, 40% on 4 years and 40% on 5 years and then 20% on 3 years. And then maybe it's 42% and [ 42% -- 16% ]. Thomas Svendsen: Okay. Good. And just on your -- if you look away from France, but just on your combined ratio. So are you thinking -- are you prepared to go materially above or somewhat above 91% in certain of your established markets if some are below and you think about the average on your existing business looking away from France? Henrik Høye: I think on existing business, we are prepared to write contracts over time that can be slightly above 91% on short-tailed business, if it makes sense. And that can mean first year not to do a price system, but that it is necessary to come in on a higher combined ratio than -- or significantly higher than 91% on the first year with mechanisms and risk management initiatives that make it profitable over time. And we -- but maybe more interesting, I think, is that we then -- we're more interested in looking at new segments or going into business that we find data for, but that are new to us, which there is a bit more uncertainty around, but we have a strong book in the bottom. Unknown Analyst: [indiscernible] A question regarding volume in Sweden going forward. You mentioned that it's still somewhat irrational pricing there and as such, a bit harder to gain volume. Should we expect the coming years '26, '27 to be at approximately '25 levels? Or do you expect that to decrease or increase based on the market situation? Henrik Høye: I think that it's very hard to predict what the competitors will do over the next 2, 3 years. But I -- what we see now is that it is still more difficult in Sweden, and that probably doesn't change tomorrow. But there are a couple of market movements in Sweden that can give us more opportunities. So one of the largest players in Sweden is not -- they haven't officially run out with it, but they are not very interested in brokers, and that can give some better opportunities, more opportunities. There are also some large initiatives on facilities in the Swedish market that goes for the whole Scandinavian market, where we have a very strong position with the brokers to do that cooperation. And then we're in a game where it's more about finding an efficient way of dealing with clients that are slightly smaller and give them a good product through a broker, and that can grow the broker market share -- brokers' market share. And that's -- since the largest Scandinavian broker is headquartered in Sweden, they are furthest ahead there. So there are some market opportunities that can be bigger, but the competitive landscape is a bit volatile in Sweden. Unknown Analyst: You've probably been asked this question many times before, but why did you really choose France? Henrik Høye: Yes. So the short version of that is that we looked at many countries on a high level. Is it -- do the brokers have a good market share? And is the market large enough that we -- that it is interesting to us? Is data available in that market. And public sector has been important for us. That is a market that is -- has the same dynamics as we used to with public procurement regulations and a similar type of insurance purchase. And then we -- through the high-level analysis we started in Spain, we didn't get data in Spain. When we went to France, which was #2. And then we met the brokers, got data in France, and then we can go to the table and at least have a similar starting point as competitors when it comes to competence and understanding of the history. No more questions. Thanks for meeting or listening in. I wish you a good day.
Operator: Good morning, ladies and gentlemen, and welcome to Champion's Third Quarter Results of the Financial Year 2026 Conference Call. [Operator Instructions] I would now like to turn the conference call over to Michael Marcotte. Please go ahead. Michael Marcotte: Thank you, operator, and thank you, everyone, for joining us here to discuss our third quarter results. Before we get going, I'd like to highlight, we'll be using a presentation that's available on our website at championiron.com. I'd like to highlight that throughout this call, we'll be making forward-looking statements. If you want to read more about forward-looking statements, risks and assumptions, you can also visit our MD&A, which is also available on our website. Joining me here today includes many of our executives, including David Cataford, our CEO, who will be doing the formal portion of the presentation; and our COO, Alexandre Belleau. With that, I'll turn it over to David. David Cataford: Thanks, Michael. Thanks, everyone, for being on the call today. I'm very happy to be able to present the fiscal year 2026 third quarter results. In terms of the highlights, so we managed to produce roughly about 3.7 million tonnes during the quarter and sold just shy of 3.9 million tonnes also during the quarter. One of the big highlights as well is we've continued to improve on our cash costs. So our cash cost delivered in the vessel in Sept-Îles was just below $74 per tonne, which translated in the quarter when you look at the realized price of an EBITDA of $150 million, a little bit less than the previous quarter, but the main difference was essentially the provisional price adjustment. So we managed to have a pretty flat quarter-on-quarter. In terms of community governance and sustainability, continued working with local communities and also with the -- our First Nations partners of Uashat mak Mani-utenam. One of the big highlights is we managed to send roughly about 160 people to the community to do a full immersion to be able to work alongside with the community, again, strengthening our partnership and allowing us to view potentials for growth in the future alongside our partners in Uashat mak Mani-utenam. In terms of operational results, one of the highlights for the quarter is definitely the amount of tonnes that we were able to bring down from the stockpiles at Bloom Lake. A lot of those tonnes are now sitting at the port, but we much prefer having them closer to the vessels at the port than on stockpiles at the Bloom Lake site. So we managed to decrease our stockpile by about 1.1 million tonnes quarter-over-quarter, reducing the stockpile to about 600,000 tonnes at the mine. Our inventories increased at the port to roughly about 900,000 tonnes, and we'll be able to destock that over the next few quarters to be able to fill the vessels [ in this system ]. In terms of our operations, again, as we mentioned, quarterly concentrate production of about 3.7 million tonnes. What's important to note as well is that we continue to operate in a way that keeps the mine very healthy. So when you look at our strip ratio, the amount of tonnes of waste that we've moved during the quarter, again, making sure that ore is available and that we can continue working on our blending strategy to make sure that we can dilute down a portion of the harder iron ore that we've had in one of the small zones that we discovered that we disclosed to the market a few quarters ago. In terms of the industry overview, so a pretty flat quarter when you look at the P65, the freight and the premium for the P65 over the P62. So during the quarter, P65 averaged about $118 per tonne, a slight increase of about 1%. There was a very slight decrease in terms of the premium for the P65 over the P62 and a slight increase in C3 freight cost of about 2% during the quarter. But again, pretty flat in terms of quarter-on-quarter. What does that do on our provisional price adjustments? So when you look at this quarter, very uneventful provisional price adjustment, about USD 3.3 million over the quarter. When we account this over 3.9 million tonnes that were produced, it has an impact of about $0.80 per ton in terms of the tonnes sold. When we look at the tonnes that are still on the water now at the end of the 31st of December, we had about 2.5 million tonnes in transit, and we've expected a price of around USD 117 per tonne. If you look at our average realized selling price, pretty close to the P65 index. As you know, we have some tonnes that are still subject to slight discounts due to the fact that we're selling more on spot and not on long-term contracts. This is the year that we'll be able to start shifting that portion because as we deliver our new plant and we're able to sell 69% iron ore, we will now enter into longer-term contracts. But when you look at this quarter, when we account for the conversion of U.S. to CAD and discount the freight cost, we had a net realized price of about CAD 121 per tonne. In terms of our cash costs, so we've continued working on our cost at site, reducing again our cash cost during the quarter to just below $74 per tonne delivered in the vessel, pretty big decrease, and we're continuing to work on our costs. So as you know, the main factors for us is definitely when we have a good iron ore recovery and we have good production, that definitely reduces the cost per tonne at our site. Mind you, this quarter was a quarter that did not have a major shutdown, but still continuing our downward trend in terms of operating costs. What does that translate in terms of financial highlights? So as we mentioned, revenues of about $470 million, EBITDA of $150 million and a net income of $65 million for the quarter. In terms of our cash, so cash sits at roughly about $245 million on the 31st of December this year. Main impacts were obviously the cash flows from operations, where we invested, we invested mostly on the sustaining CapEx and also the DRPF CapEx, and we also paid out our semiannual dividend during the quarter. There was also a change of working capital, mainly due to receivables that have increased. So that should unwind in the next quarter. In terms of our balance sheet, very well positioned to be able to continue our growth initiatives, about $1.1 billion of cash, cash equivalents and working capital and also including the available liquidities that we have on our various facilities. So very well positioned to be able to finalize our growth initiatives. Talking about our growth initiatives. So if we look at our main project, the DRPF project, so we're coming close to completing the project now and being able to commission the first tonnes, still on target to reach our $500 million investment for the full project. Right now, all the equipment is installed. So it's just finalizing some tie-ins with the equipment, and we're now also starting the commissioning of certain equipment as we speak. So pretty excited about the next steps for this project. We're still on target to be able to deliver our first tonnes of DRPF and our first vessel in the first half of this year. When we look at the impacts of starting the plant, we just need to remind everyone that there are some impacts that will come with the interactions with the Phase 2 project. So there will be some interruptions in the plant as we commission the various equipment. We had forecasted in our feasibility study roughly about 20 days for the Phase 2. We'll try to make up a portion of that for -- in the Phase 1 plants, but there will be some interactions in the coming quarter to be able to fully commission this plant. But once that's done, we do expect a ramp-up of roughly about 12 months to be able to get the plant fully running and minimal impacts on the actual Phase 2 production once the tie-ins are completed. So very exciting because we're now finalizing all of the potential contracts with various clients. We do expect to sell most of those tonnes in markets that we had announced, so either Europe, North Africa or Middle East. So working with our partners to be able to finalize those contracts, and we'll be ready for when these tonnes come into the market in the first half of this year. One of the other highlights that we discussed also just a few days before Christmas was the potential acquisition of Rana Gruber. So we entered into a transaction agreement with Rana Gruber to acquire the company. The transaction is fully financed. So a portion of cash, roughly about USD 39 million. We have La Caisse de dépôt, one of our long-standing partners that is also supporting us for USD 100 million. And we also have a fully underwritten term loan with Scotiabank of USD 150 million that we'll start syndicating down to our bank syndicates. So as my understanding, all of our partners are very happy to support us with this transaction. Again, just to remind everyone why we're doing this transaction. Well, one, Rana Gruber is a robust operation that's operated for over 60 years, uninterrupted in all of the various cycles. They benefit from pretty interesting margins in terms of the material that they produce, and they're also on track to start producing higher-grade material, which is fully aligning with what we do at Bloom Lake. They're also very well positioned versus European clients. This is a client base that we want to increase in the future. And there are just a few days of sailing time from their various clients, making it a producer of choice for a lot of steel mills in Europe. We do think there are opportunities in the future with the asset to be able to potentially increase on the volume side, and we also benefit from an extraordinary team over there, fully aligned in terms of values and operation style. So we do think that this is very positive to be able to combine the 2 -- these 2 assets. In terms of our other projects, so as you know, we're also working on the feasibility study and the permitting of the Kami Project. So that's all going according to plan. We should be in a position by the end of this year to finalize the feasibility study and potentially obtain our construction permit for the project and also fully aligned with our partners, Nippon Steel and Sojitz to be able to continue on the next step. So we'll see once we finalize the feasibility study and the permitting process, where is the market for DR grade type material, and we'll then be able to look at the next steps for the project going forward. We also, just to remind everyone, have over 5 billion tonnes of resources just south of Bloom Lake. So we are doing a little bit of drilling just to make sure that we can refine our estimates in terms of the actual tonnes over there, but all very high-grade material that is -- I think will position us very well in the future. Short term, maybe no impact, but in the medium, long term, could definitely be very beneficial for our company. So with that being said, I'd like to thank all of our staff and everyone for making these results possible. I think, again, a very good quarter. We had a few hiccups last year and definitely had some quarters that were impacted by either forest fires or a bit of breakage on certain equipment at our site. But I think that's behind us, and we're now back in a very good operational position. And I think when you look at the results and the cash costs that are continuing to come down, it's a proven element that we're back on track in terms of operations. So with that being said, I'll turn it over for the Q&A portion of the call. Operator: [Operator Instructions] Your first question is from Julio Mondragon from BMO Capital Markets. Julio Mondragon: So I just got a couple of questions. But the first one I would like to ask is, well, you have seen the cost reducing significantly quarter-on-quarter, what are the key drivers of this cost reduction? And also, how sustainable this is in the near term? Like what would be your unit cost target for the next few quarters to understand a little bit more about your cost strategy here. David Cataford: Well, the cost strategy is always to produce at the lowest cost possible. When you look at the results, well, obviously, this was a quarter that didn't have a major shutdown. So quarter-on-quarter, that was one of the impacts in terms of the cost reduction. When you look at the amount of tonnes that were produced, definitely, when we produce more tonnes, well, we'll always have a lower cost per tonne. So that's definitely one of the elements that has improved. And as we come out of this whole stockpile history portion, well, that's definitely going to reduce our costs as well going forward. So those are the main elements. But our strategy is definitely to continue working on various elements that we can improve our costs. How do we do that? Well, we're improving the mining efficiency, also working on our shutdowns to be able to be more efficient. If we can get that plant up and running a little bit more often, well, that's going to allow us to produce more tonnes, it's going to dilute down a lot of our fixed costs. So those are definitely the strategies that we have shorter term to be able to continue on the trend to have good operating costs. Julio Mondragon: And if I could ask one more question. So currently, you are targeting commercial production in the first half of this year from the DRPF plan. So does it mean you are going to achieve nameplate capacity in this period? And also because we're talking about premiums, can you provide a quick outlook of the market and the premiums for this product? David Cataford: Yes. Thanks for the question. So once we get the plant up and running, we believe the ramp-up time is going to be roughly about 12 months to get the full nameplate capacity. So that's the time frame to be able to get the full nameplate capacity. If we can do it quicker, well, we'll definitely come back to the market, but that's what is in our plan right now. In terms of premiums, well, obviously, when you have a new product like ours, at 69%, we need to be able to prove to our various clients that we can hit that number and that it reacts well in their plans. So there's always some trial discounts to the DR grade premiums when you look at the first cargoes. But I think once we are able to demonstrate to our clients that we're hitting consistently the quality, well, then we'll be able to get out of that territory and start benefiting fully from the CR premiums. In the market today, the DR premiums have increased slightly compared to last year. So I do think we're in the right trend. But for us, you have to remember that, one, there's the premium that is interesting, but there's also the freight advantages by selling closer to home. So when you combine those, I do think we're going to have better margins for our material, hence, better returns for our shareholders. Operator: Your next question is from Orest Wowkodaw from Scotiabank. Orest Wowkodaw: Two things from my end. First of all, on the ship loader issue at the port of Sept-Îles, how -- is that rectified? Or how long was that down? I'm just wondering when normal shipments would have resumed post year-end? David Cataford: Yes. Thanks for the question. That was roughly about 4, 5 days. So it wasn't a -- well, I mean, we consider it major, but when you look in the yearly results, it's not necessarily major, just annoying for us because we would have sold probably an extra vessel during the quarter, which would have been nice. But realistically, the operations restarted about 5 days after the breakage. I don't think it's something that is necessarily recurrent, just an issue that happened, but unfortunately, happened right at the end of the quarter. Orest Wowkodaw: Okay. So should we expect that the 900,000 tons of inventory at the port to basically be cleared out here in the current quarter? David Cataford: Well, there's always going to be inventory at the port because as you know, vessels are roughly about 200,000 tons. So it's tough for us to clean out the inventory completely. So I'd say probably closer to 2 quarters to be able to get down to a level that is more in the range of having one vessel on the ground. So that's realistically about the time frame that we believe we can get those tonnes down. Orest Wowkodaw: Okay. And then just changing gears back to the DPRF. Should -- I realize you're not expecting commercial sales, I guess, until sometime in the second calendar quarter. But should we -- like as we're waiting for better visibility on what premiums may look like, should we start to anticipate that like we're going to see some increase in your blended realized price starting as early as Q2 and that ramps over future periods? Or should we just thought -- or is that not realistic? David Cataford: I think it's probably closer to Q3 where you're going to start seeing some results. Q2, definitely, we're going to have our first tonnes that are produced, first tonnes that are sold. But depending on how the actual integration goes and we're able to start up the plant when we look at the interruptions that we'll have to be able to tie in the actual plants together, I think in Q2, that's not when we're going to start seeing the results. It's more in Q3. Orest Wowkodaw: Okay. And when you mentioned earlier also the 20 days of tie-in, is that this current calendar quarter? Is that when that's expected? David Cataford: It's Q1 of fiscal year 2027. So sorry, I think I said on the call this quarter, but in my mind, we're already in April. Orest Wowkodaw: Okay. okay. So we're talking calendar Q2? David Cataford: Correct. Operator: [Operator Instructions] And your next question is from Fedor Shabalin from B. Riley Securities. Fedor Shabalin: David, so several quarters ago, you mentioned that Bloom Lake output could reach between 17 million and 18 million tons annually once all bottlenecks are resolved. The progress of debottlenecking in the fourth is clearly visible. And my question is, where are we now on the path to achieving this 17 million, 18 million tonne production target at Bloom Lake? And I would assume we're not far away. And what additional steps remain to get there? David Cataford: Yes. Thanks for the question. When we go back, the main target for us was definitely to make sure that if we do some investments, we'll be able to get those tonnes down. So the main focus was really to be able to work on the rail portion to make sure we can get the tonnes. When we look at the last quarter, we brought down quite a lot of tonnes from site. So that definitely gave us some good visibility. Now we're in a situation where we're back in the very, very cold winter months. It's actually a very cold winter up to now. So there are some elements that impact the rail portion. But when we take all that into account, I do think we're in a territory where we feel more confident that the logistics side will be able to bring down the tonnes. So now most of the work to be able to define what needs to be done to be able to increase the production is pretty well known. So we're going to start working on those projects to be able to look at the debottlenecking. But that was also one of the thought processes when we looked at acquiring a project like Rana Gruber. So initially, we thought those tonnes would come from Bloom Lake. I still think that Bloom Lake will get to the 17 million, 18 million tonnes. But in the interim, we will now have an asset that produces just shy of 2 million tonnes out of Norway, and that's definitely going to help as well in terms of the production increase. Fedor Shabalin: Yes. That's helpful. And my follow-up question is on DR grade market overall. What does the current landscape look like? And how large is demand now? And do you anticipate any changes to premium above 65% Ferrum from P65 that you outlined previously? And if I recall correctly, it was roughly in the ZIP code of $20 per metric ton. And are there plans to sell a portion of DR pellet feed output to third parties? David Cataford: Yes. Thanks for the question. So the thought process is not to sell those tons to third parties. So we want to sell directly to the steel mills that require this type of material. Again, when we look for potential clients, we want to make sure that they have the right ports so that they can take capesize vessels so that we can fully benefit from the closer to home tonnes. If there are some advantages by going with the smaller Panamax, but there's still some freight advantage for us, it's definitely something that we can look at. But when we combine the freight advantage and also the premiums for the DR, once we get out of the trial cargoes, I do think that the market is looking pretty good to be able to get a significant premium on our side. When you look at this year, well, the DR grade seems to be in a better position than it was last year. But again, there's quite a lot of noise with projects like Simandou coming on. So it doesn't impact the DR grade, but it did impact the view on the high-grade material, not necessarily ramping up to the level that was initially expected. So I think that's keeping the high-grade portion quite healthy. But we will see in the next quarters where that DR premium goes. But when we look at the fundamentals, there's quite a lot of plants getting delivered that need this type of material. There are some plants that have tried to also find ways to upgrade material that might not deliver the results that they thought. So that will definitely be some potential clients for us down the road. But when I look at the environment closer to the whole Sept-Îles port, I do think that we'll have the right clients to sell our material at the right premium there. Operator: Your next question is from Dalton Baretto from Canaccord Genuity. Dalton Baretto: David, I wanted to start by asking -- well, I've got 2 questions on Rana Gruber. I'll start with the first one. When you look at their client base, particularly in Europe, do you see any synergies there with you trying to place the DRPF material? Does that help you in any way? David Cataford: Thanks for the question. So definitely some advantages just in the fact that also they're so close to their clients. So when we sell to Europe, we're close, but we're not that close. They're about 3 days sailing time. I think there's some good potential combinations on that front. When I look at potential blending strategies, that's definitely something that's top of our mind as well. So is it possible to have some potentials in that front to be able to get a better premium for material. That is something that we will look at. I think the main focus now is definitely closing the transaction, making sure that the asset is under our control in the next few months. And then I definitely see some potential advantages and synergies with clients in Europe. Dalton Baretto: That's great. And then similar sort of question, but on the operations side, I was looking at their Capital Markets Day presentation from last year, and it looks like they're about to set off on the same trajectory that you guys just went through in terms of upgrading their material to DRPF. Given what you guys have just been through, do you think that you can accelerate that time line at all? David Cataford: There's various ways to look at it. If you remember, even at Bloom Lake, initially, we thought, do we want to build 1 or 2 flotation plants and get all of our tonnes to 69%, but we thought maybe it makes more sense to do one and maybe there'll be a blending strategy directly at Bloom Lake. So if we transpose that to Rana Gruber, is it the upgrade that is necessary because now we're only looking at 2 million tonnes? Or is it possible to take, let's say, 1 million of those tonnes, blend it with some 69% material and it becomes DR grade. So there's -- again, there's a lot of potential synergies between the 2 sites. Does it mean that we have to accelerate a DR transition at Rana Gruber? Or does it mean that we can work in a different space. We'll definitely look at what's the most accretive for our shareholders. Operator: There are no further questions at this time. I would now like to turn the call over to David Cataford for the closing remarks. David Cataford: Super. Thanks, everyone, for your support. Thanks for being on the call today and not looking at a gold analyst at this time. So yes, gold is definitely in favor, but I do think that the high-grade premium for our material is going to be extremely interesting in the coming years. When I look at our company, I mean, we're just coming out now of a 7-year CapEx cycle, roughly about $2.5 billion invested on time and on budget to create the foundation that we have now. And I do think that in the future, we'll be able to benefit from very good premiums and have a very interesting capital return strategy for our shareholders. So again, thanks, everyone, for your support and looking forward to speaking to you in the next quarter. Operator: Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.
Operator: Hello, and welcome to the National Fuel Gas Company First Quarter Fiscal 2026 Earnings Call. My name is Harry, and I'll be coordinating your call today. [Operator Instructions] I will now hand the call over to Natalie Fischer, Director of Investor Relations. Please go ahead. Natalie Fischer: Thank you, Harry, and good morning. We appreciate you joining us on today's teleconference for a discussion of last evening's earnings release. With us on the call from National Fuel Gas Company are Dave Bauer, President and Chief Executive Officer; Tim Silverstein, Treasurer and Chief Financial Officer; and Justin Loweth, President of Seneca Resources and National Fuel Midstream. At the end of today's prepared remarks, we will open the discussion to questions. The first quarter fiscal 2026 earnings release and January investor presentation have been posted on our Investor Relations website. We may refer to these materials during today's call. We would like to remind you that today's teleconference will contain forward-looking statements. While National Fuel's expectations, beliefs and projections are made in good faith and are believed to have a reasonable basis, actual results may differ materially. These statements speak only as of the date on which they are made, and you may refer to last evening's earnings release for a listing of certain specific risk factors. With that, I'll turn it over to Dave Bauer. David Bauer: Thank you, Natalie. Good morning, everyone. I want to start by taking a moment to recognize the fantastic job by our operations team who are braving incredibly challenging winter weather conditions. As you'd expect, our systems are holding up extremely well with minimal operational disruptions at Seneca and no significant issues on our transmission and distribution systems. Thank you to everyone for your hard work. I really appreciate it. Moving to our results. The first quarter was a solid start to the fiscal year with adjusted earnings per share of $2.06, right in line with our expectations. Our integrated upstream and gathering business continues to perform well with higher production and natural gas prices driving a 29% increase in adjusted EBITDA compared to the prior year. Our regulated businesses also delivered strong results, driven in part by our 3-year rate settlement at our New York utility and our pipeline modernization tracker at our Pennsylvania utility. Overall, we're pleased with our first quarter results, which provide a great foundation for the balance of the year. Looking ahead, the outlook for natural gas is as strong as it's ever been with demand at all-time highs. On top of that, there's a growing need for LNG feed gas and new baseload power generation, most of which will be produced using natural gas. And from a policy perspective, there is a rising tide of bipartisan support for an all-of-the-above approach to energy. Against that positive backdrop, our focus remains on operational excellence and the continued growth of National Fuel. In our Integrated Upstream and Gathering segment, we continue to expand Seneca's inventory and significantly improve capital efficiency, which is on track for a 30% gain since 2023, far outpacing our peers. Well results from our Lower Utica program in Tioga County remain among the basin's best and success in delineating the Upper Utica over the last couple of years has essentially doubled our core Tioga inventory estimate. We'll remain disciplined in how we leverage our integrated operations as we develop this region over the coming decades. Our Upper and Lower Utica co-development tests will offer critical insights to guide our long-term strategy, and Justin will speak more to this later in the call. Switching to our pipeline business. Our near-term expansion projects are progressing well. The Tioga Pathway project is moving forward according to schedule. We received our notice to proceed from FERC earlier in the month, and we will begin tree clearing in the next few weeks. Additionally, our Shippingport Lateral Project has now received all its required permits, keeping it on track for a late calendar 2026 in-service date. Beyond these 2 projects, we're seeing increasing interest in other expansion opportunities across our systems, and I'm optimistic we'll have additional projects to talk about in the coming year. Before leaving the pipeline business, one quick comment on ratemaking. Supply Corporation expects to file a rate case later this year to recover costs related to our modernization program and general expense inflation since our last rate increase 2 years ago. I'll keep you up to date on our plans with respect to timing as we move through the fiscal year. Turning to the Utility business. Yesterday, our Pennsylvania division filed a new rate case that requests an approximately $20 million increase in rates. In addition to addressing general cost inflation, the case will reset our modernization tracking mechanism, which will allow us to maintain the cadence of that program. If approved, customer bills will go up by about 11%, which is below the rate of inflation we've seen over the 3 years since we last increased delivery rates. Customer affordability has been and always will be a top priority for us. We currently have the lowest rates in Pennsylvania and fully expect we'll maintain that position after this case. We're the lowest cost provider in New York as well. The utility is in year 2 of a 3-year rate settlement that extends through the end of fiscal 2027. Even with the increases approved as part of that settlement, our delivery rates are still the lowest in the state. In fact, over the last 20 years, the rate of increase in our customer bills is well below the rate of inflation. And with a cost that's 3.5x more affordable than electricity, natural gas is unquestionably the fuel of choice for space heating in Western New York. New York policymakers are increasingly in favor of an all-of-the-above approach to energy. The state's energy plan, the final version of which was published in December, acknowledges the difficulty in meeting the targets required by the Climate Act and emphasizes the need for continued investment in natural gas infrastructure to support New York energy demand. Further, the state has agreed to delay implementation of the All-electric Buildings Act pending resolution of ongoing litigation. The delay is expected to last at least 1 year and could be permanent if the court rules in the industry's favor. We've long advocated that an all-the-above approach to energy is the most effective way to both reduce emissions and maintain the affordability and reliability of energy supplies. I'm encouraged to see policymakers begin to move in that direction. Lastly, at the Utility, we're making great progress on our acquisition of CenterPoint's Ohio LDC, which remains on track to close in the fourth quarter of calendar '26. With respect to financing, in December, we completed a well-executed $350 million private placement of common stock, which satisfies our equity need for the transaction. With respect to regulatory approvals, both the HSR and Public Utility Commission of Ohio notice filings were made earlier this month. And the National Fuel and CenterPoint teams are working closely to ensure a smooth transition for customers and employees. We're really excited about this transaction and the value creation opportunity it offers. Tim will have more details on the acquisition and our financing plans later in the call. Bringing it all together, it's an exciting time to be in the natural gas industry. National Fuel has a unique set of integrated assets in the most prolific gas region of the country. Add to that a strong investment-grade balance sheet, and we are very well positioned to help develop the resource and build the infrastructure needed to serve the growing demand for natural gas. With that, I'll turn the call over to Tim. Timothy Silverstein: Thanks, Dave, and good morning, everyone. National Fuel had a great start to the fiscal year with adjusted EPS of $2.06, which keeps us on track to achieve our full year guidance. Since Dave hit on the high points for the quarter, I'll just briefly explain 2 items impacting comparability that result from our pending Ohio utility acquisition. The first relates to costs incurred ahead of the expected calendar fourth quarter closing. This is a combination of transaction-related costs, items such as legal fees and regulatory filings as well as integration readiness costs to prepare us for post-close operations. We expect that a fair amount of the integration costs can be recovered in the future, particularly those tied to the development of IT systems to replace those that will remain with CenterPoint after closing. The second item is related to financing costs. While raising permanent financing ahead of closing derisk the acquisition, there is an associated cost in the form of earlier dilution and incremental interest expense, both of which we plan to present as an item impacting comparability so investors can better see the results from current operations. Switching to the outlook for the remainder of the year, all of our previous assumptions remain unchanged. We are reaffirming our adjusted EPS guidance range of $7.60 to $8.10 or $7.85 at the midpoint. We are seeing some tailwinds that could favorably impact full year results, particularly on our integrated upstream and gathering cost structure and in-basin prices, which have improved with recent cold weather. Natural gas prices remain the biggest variable for our outlook. And if the past few months are any indication, we expect to see more near-term weather-driven impacts. For example, yesterday, the February contract settled at almost $7.50, a 140% increase from just 2 weeks ago. This was a record move in the 35-year history of a NYMEX natural gas contract. Over the same time period, we saw prices for the balance of the fiscal year as low as $3 and more recently in the $3.75 to $4.25 area. Given this dynamic, we decided to maintain our previous $3.75 assumption for the remainder of the fiscal year. Prices will likely keep moving around. And as a result, we will continue to provide earnings sensitivities at various levels. While pricing fluctuations will likely persist, our hedge book provides downside protection in 70% of our remaining production for the fiscal year, while allowing for us to capture upside to the extent higher prices persist. Within our 2026 portfolio, we have approximately 80 Bcf of collars with an average weighted floor of $3.60 and a cap of $4.75. These collars, along with our unhedged volumes provide us with exposure to higher prices on more than 50% of our expected remaining production. Looking beyond this fiscal year, we were opportunistic in the fall when the longer end of the curve moved up quickly. Across fiscal '27 and '28, we added swap layers between $4 and $4.25, and collars with weighted average floors in the high $3 area and caps well north of $5. At these prices, we are locking in strong cash flows and high returns. Switching to capital, the outlook is unchanged from our prior guidance. Collectively, with earnings, capital and cash flow in line with previous expectations, we are confident in the strength of our balance sheet, which we expect to approach 1.75x net debt to EBITDA as we exit fiscal '26. This outlook played into our decision to stay below the high end of the range of equity needed to fund our Ohio utility acquisition. As Dave mentioned, in December, we issued $350 million of common equity via a private placement. Coming out of the acquisition announcement, we had broad support for the transaction and its strategic merits. We received several unsolicited inbounds expressing interest in a transaction that could be executed in advance of our original public offering timeline. Given the strong demand, we were able to take equity risk off the table at a 2% to 3% discount to our market price at that time. This transaction took care of our expected equity needs for this acquisition. When combined with our current business outlook, we are confident that by the end of the first year post closing, we will be able to achieve the low end of our previously disclosed 2.5 to 3x net debt-to-EBITDA range. With our equity needs solved, our focus turns to debt financing. Between the remaining proceeds needed for the acquisition at closing as well as refinancing our term loan and October long-term debt maturity, we expect to issue approximately $1.5 billion in long-term debt. As a reminder, any public offering tied to acquisition financing of this size drives underwriters to require pro forma financial statements, which in turn are contingent on audited financials of the acquired asset. We expect to receive those audited financials in the next month or so, and we'll have the pro formas shortly thereafter, at which point we can begin evaluating the timing of our transaction. Sticking with CenterPoint, Dave gave a high-level update on the major work streams but I want to touch on a few more points. First, the Ohio Commission issued its final order in CenterPoint's rate case, where they modified a few key terms of the proposed settlement. First, they slightly lowered the agreed-upon ROE to 9.79%, a 6 basis point reduction from the proposed settlement. This will have a fairly small impact on near-term earnings, roughly $500,000 per year. The other action the commission took was to extend the amortization period of deferrals related to various modernization trackers from 15 to 25 years. In the near term, this has no impact on earnings but does modestly reduce cash flows. Longer term, this is actually a benefit as we will be able to earn on a larger rate base amount, which is a tailwind to our long-term earnings and cash flows. More broadly, the Ohio regulatory environment has further positive trends developing. Most notably, the Ohio Governor recently signed into law a bill that modernizes the natural gas ratemaking process. We were optimistic this would occur in the near term but didn't incorporate it into our overall valuation. The new construct significantly shortens the rate case timeline, which typically took 15 to 18 months but now is required to be completed in 360 days. It also moves from a historic test year to a 3-year fully projected test year with annual true-ups to authorized ROEs. These are nice improvements from the current approach as they minimize regulatory lag and provide greater certainty in achieving allowed returns. We remain excited about the Ohio utility acquisition. And as we spent more time with the employees that support this business, we've seen that we're not only acquiring a great asset but also a great team. Overall, the outlook for our business is as strong as ever. Fiscal '26 adjusted EPS is projected to grow 14% over last year, and the setup for 2027 is for even more growth across the organization. Our balance sheet remains strong, which provides flexibility to capitalize on further growth opportunities that may arise. Overlaying this with the broader tailwinds across the natural gas industry, and you can see why we are excited about our ability to continue to create significant long-term value for shareholders. With that, I'll turn the call over to Justin. Justin Loweth: Thank you, Tim, and good morning, everyone. I want to begin by echoing Dave's appreciation for our dedicated employees and contractors. Your planning, communication and teamwork throughout the recent storm and ongoing extreme cold weather has been exceptional. Thank you for keeping our gas flowing and doing so safely. Turning to the quarter. Our integrated upstream and Gathering business delivered a strong start to fiscal '26. driven by consistent execution across our operating teams. Net production was 109 Bcf, an increase of 12% over the first quarter of fiscal '25. This significant production growth paired with lower capital spending highlights the strength of our Tioga Utica program and our relentless focus on capital efficiency. As we continue testing to further optimize well designs, we expect additional productivity gains in the quarters to come. We are reaffirming fiscal '26 guidance with production of 440 to 455 Bcf and capital of $560 million to $610 million. We expect capital to be relatively steady throughout the year. Looking ahead, starting in the second half of the year, Seneca will maintain its plans to operate a single drilling rig and a full-time frac crew, and gathering will ramp up seasonal construction of pipelines and other infrastructure over the summer months. The only other item of note is the timing of activity for a joint development pad, which could pull forward about $10 million of capital into fiscal '26. On production cadence, we anticipate Q2 volumes will be slightly down from Q1, in part due to till timing and deferring some activity during the recent storm. Moving into Q3, we expect production to increase and then hold relatively steady through the end of the fiscal year as we bring online some large Tioga Utica pads during that time frame. Looking ahead, we have several important initiatives underway to optimize future development. First, we are advancing our Tioga Utica well design through Gen 4 testing. This spring, a 5-well lower Utica pad featuring wider inter-well spacing and larger completion designs is expected to come online, enabling us to assess productivity and cost impacts, what we refer to as bang for our buck. In the Upper Utica, we are piloting similar larger completions to evaluate whether the improved performance we have seen in the Lower Utica can be replicated. Above ground, we are enhancing facility designs to support higher initial rates up to 40 million per day on longer laterals while minimizing incremental capital. Second, we are just beginning to flow back our first full upper and lower Utica co-development pad and have more tests planned over the next 12 to 18 months. While the Lower Utica is our current operational plan based on slightly better economic performance, our testing program is designed to confirm that view over a broader set of results and well designs. As results come in, we will preserve flexibility across both development paths and remain focused on identifying the highest returning integrated development program. Turning to Gathering. Our focus remains on supporting Seneca's volumes while adding new third-party production in Tioga County. Our near-term plan leverages existing facilities with target additions of new pipelines and compression. We are also building for the future and recently completed pad construction for the Croft Hollow station, which is located in the northwestern section of our development area. The build-out of this large centralized station and its associated pipeline network is designed to meet expected growth in both Seneca and third-party volumes over many years. Turning to the natural gas markets. Winter Storm Fern has brought very cold weather to a large portion of the U.S. and with it natural gas price volatility. We believe this kind of price fluctuation is the new normal and will persist in the coming years. Strong structural demand from LNG exports and power generation, combined with limited new storage and pipeline infrastructure supports a price environment in the $3 to $5 range with potential for weather-driven deviations lasting weeks or months. Given this outlook, we will maintain disciplined risk management practices and an emphasis on retaining upside during periods of peak demand. Our increasing future production is supported by a diversified and growing portfolio of firm transportation and firm sales. Our total firm transportation capacity will grow from 1 Bcf a day to 1.5 Bcf a day over the next few years with recently announced interstate pipeline projects and capacity releases we have secured. However, we are not stopping there and are actively evaluating opportunities to further expand our marketing portfolio. More near term, we are tactically protecting our production with roughly 80% of our remaining volumes covered by physical firm sales that link our price realization to mostly NYMEX and premium out-of-basin markets. On the sustainability front, I want to highlight a significant achievement. We recently executed a first-of-its-kind 10-year agreement to provide 250,000 MMBtu per day of MiQ certified methane reduction certificates to a European utility. This agreement reinforces Seneca's leadership in responsibly sourced gas and provides a framework for similar transactions in the future. In closing, our integrated Upstream and Gathering business entered 2026 from a position of strength, and our momentum continues to build. Our focus on capital efficiency through well-designed testing, co-development pilots and ongoing operational optimization provides us -- positions us to further enhance long-term value. Combined with our Integrated gathering assets and diversified marketing portfolio, these efforts support best-in-class margins and growing free cash flow in the years ahead. With that, I'll ask the operator to open the line for questions. Operator: Our first question today will be from the line of Zach Parham with JPMorgan. Zachary Parham: First, I just wanted to ask on if you have any ability to take advantage of local prices that have spiked over the last week or so, we've seen some of the local basis points spike into the triple digits on some days given the cold weather and the freezeouts we've seen. Do you have any ability to flow incremental volumes and take advantage of that? Just curious if you were able to benefit at all there. Justin Loweth: Yes, Zach, it's been a remarkable time, hasn't it? The pricing has been historic highs. We've got a fantastic marketing portfolio. And so we do always keep open a little bit of gas daily, daily, including to markets like non-New York and Z5 on the Transco system, which saw some of those extremely high prices. So absolutely, it's not -- there's a good base of our gas that we really just tie back to NYMEX but we do keep a small portion open to try to take advantage of those prices when they happen. So it was a pretty interesting weekend and exciting time. We're still seeing fantastic in-basin pricing today, too. Zachary Parham: And then my follow-up, I just wanted to ask more broadly on the pipeline side. Could you talk about the potential for future growth projects in the pipeline business beyond Tioga Pathway and the Line N Lateral that you've announced. I know there's a lot of infrastructure development going on in the basin. Just curious what the opportunity set there could look like to drive further growth from the pipeline business. David Bauer: Yes. Zach, yes, I definitely think we'll have additional opportunities over time. You look at where our pipelines are located, I mean, they're in pretty much the best area in the country for doing projects, whether it's proximity to the resource itself or the infrastructure to deliver it. So we've had continued interest in projects in and around our Line N system. We tend to be pretty conservative when we announce projects but we are in active dialogue with other parties and fully believe we'll have additional opportunities down the road. Operator: The next question will be from the line of Noah Hungness with Bank of America. Noah Hungness: For my first question here, there is a few bills working their way through the Senate regarding federal permitting reform, a couple targeting changes to NEPA and the Clean Water Act. I was just wondering your all thoughts if those bills do end up passing, how would that change how you think of regulated pipeline projects and other projects that may be able to be greenlit? David Bauer: Yes. Well, I think it would be great if they were passed both for the pipeline industry and the renewal industry for that matter. I'm not sure that it would change our view on pipeline development, right? I mean we've got a great team that runs all the traps on getting these projects developed. And for us, the permitting reform issue has generally, at least in Pennsylvania, been a question of time as opposed to whether projects get built or not. So I think the net outcome of permitting reform would be projects would get built sooner. Noah Hungness: Great. And then for my second question, this is probably for you, Justin. How can we think about the D&C costs of the Seneca Gen 4 design? And how does that compare to some of the costs shown on Slide 50? And also, could you maybe talk about what D&C costs would look like for the larger upper Utica frac? Would that also be similar to a Gen 4 design? Justin Loweth: Yes. Sure, Noah. So there are several things going on with the Gen 4 design that we're looking at. But if I really boil it down to, I think, the 2 biggest factors, it's a little bit wider inter-well spacing and then obviously, the upsized proppant loading and completion design going to 3,000 pounds per foot more or less. So really, the main cost that you have when you do something like that, you're pumping a little bit more fluid, you're pumping a little bit more sand and you've got a little more pump time. And so ballpark, that adds probably $150 to $175 a foot, something like that. we see in the -- we've got a couple of tests in the ground now where we did this on a pad and had a single well where we kind of tested out the Gen 4 design. We're now moving to the place where we're testing these out where all the wells on a pad are going to be Gen 4 designs to kind of see it. But we think there's a pretty meaningful uplift that is significantly in excess of that incremental cost in terms of overall pad-based IRRs and ultimately, EUR that we would get out of these wells. And so right now, we're excited to kind of see that play out. I noted in my remarks, we've got this spring, our first well that will be -- our first pad, excuse me, that will be a true pad Gen 4 design. It will come online, we expect later in the spring. And so that will be a great opportunity to really see how these wells do. I will note we already rate constrained and rate restrict all of our wells. We kind of hold them flat at around that usually 25 million, 30 million a day. And the other element, though, on Gen 4 and just generally is we're looking at facilities where we would hold them flat at up to 40 million a day. So there's a lot of things playing into that. But holistically, what I'd tell you is we think there's a lot of opportunity here, and we're going to continually evaluate is this a better economic answer, kind of balancing the increased productivity, the EUR versus the costs. On the uppers, it's a similar amount, and we're earlier in that testing. We just have less wells but it will go through kind of a similar process where we test out moving to maybe a larger completion design. Noah Hungness: And I'm sorry, any early thoughts on the Gen 4 productivity uplift? Justin Loweth: Yes. I would say we haven't really put in like a detail on that but that will come. But I guess what I'm sharing with you is just expect that you would take a curve where it will be rate restricted for a period but would have probably a longer flat period and then ultimately a higher EUR. And so you would have pickup, say, after you exit that flat period 6 to 12 months out, you would just be holding flat longer. So you're getting back a lot of this value nearer term. And with an increased deliverability and productivity, we may rate restrict them at a higher rate during the initial flat period. Operator: The next question today will be from the line of Gretta Drefke with Goldman Sachs. Margaret Drefke: As you've noted, natural gas pricing has continued to be incredibly volatile. But as you think about the outlook for NFG on more of a through-cycle basis, what is the optimal production growth rate for the company over the next several years? Is mid-single-digit growth still a fair starting point? Or if we go into a less constructive gas price environment maybe over time, would you be inclined to maybe slow down some of that growth if we have to work through some periods of pricing weakness? Justin Loweth: Yes. Thanks, Gretta. A couple of things on that. One, I would say, we feel pretty good about our outlook on gas kind of being in that $3 to $5 range. And when it's in that $3 to $5 range, we earn fantastic returns, and that's kind of just a continue on go forward. If we saw prices outside of that range and not consistently and in a forward curve or frankly, even to the high end of that range, I think we would be looking for ways to go a little bit faster. But the real governor for us is interstate pipeline capacity. So we need more -- I've talked about this in the past. We either need to see a little bit more attrition from other operators, particularly in Northeast PA, where some of the inventory there is more mature. And so we think there's a market share opportunity for us or we need new pipes, either through modernizations, expansions or new builds, that's really going to be the governor. Certainly, if we saw sustained prices below that 3% to 5%, we would be looking at ways to maybe moderate on the margin. But overall, our base plan is to continue in that mid-digit range, kind of 3% to 7% per year on average. Margaret Drefke: Great. And then just for my next question, last quarter, you announced 220 location additions in the Upper Utica zone. As you spend a little bit more time with that geology, can you speak to if there are any plans for further delineation or testing that could unlock even more locations and expand that upper Utica inventory across the portfolio? Justin Loweth: Sure. So there's opportunity to further expand our inventory count, both in the upper, but also in the lower. And we're continuing to appraise and delineate. So we've got over 400 Utica locations between uppers and lowers that we feel really good about and have largely appraised and delineated. We think there probably is some opportunity to have upside to that as we go forward in potentially uppers and lowers. And so that's something we'll -- we will -- we've got a lot of inventory. So it's always a balance on how much money you want to put into, call it, a leading-edge appraisal well where you're moving into, say, a different fault block versus drilling the inventory you have that's very well delineated. But we're looking to kind of continue to expand our position here and grow to have as many future development locations as possible. And so I think we'll find ways to do that. We have a lot of lot of smart people in our subsurface teams that are working through this, and we'll be testing some areas that expand potentially the boundaries of our current well-delineated 400-count upper and lower locations today. Operator: The next question will be from the line of Tim Schneider with the Schneider Capital Group. Timm Schneider: So most of my questions have actually been answered. So I'll follow up on a comment that I think Justin made in terms of volatility expected to stay here in natural gas markets. So as you kind of look at that, what do you think going forward alleviates that issue? Is it more steel in the ground, either via pipelines or storage? Or is there something else that needs to happen as well? David Bauer: Yes. Tim, this is Dave. I think it's more steel on the ground, right? I mean you look at gas prices and electric prices in the Northeast are just incredible this past week. And the easiest way to get that down, whether it's gas or electricity is building more pipeline infrastructure. And we've got the resource without question. By using more of it, we can damp down a lot of that volatility. Timm Schneider: Got it. And obviously, putting in steel storage, whatever is a lot tougher in the Northeast than it is in other parts of the country. Have you guys looked at rates that it would cost that you would need in order to put new storage assets in the ground in the Northeast to the extent that is even possible? David Bauer: Yes. And we have looked at that. It is quite high. Our focus is on optimizing our existing storage facilities, right? So either drilling, say, horizontal wells or doing other things that can either increase the amount of gas we can get downhole or improve the deliverability rates that we see when we're bringing gas out. Timm Schneider: And then lastly for me, can you remind us what percentage of your storage is merchant versus kind of contracted? David Bauer: It's 100% contracted. Under straight variable rates. Operator: [Operator Instructions] The next question today will be from the line of John Freeman with Raymond James. John Freeman: Just following up on the Upper Utica topic. Justin, have you determined sort of like what's the appropriate sort of co-development type strategy going forward? I assume there's been some testing, maybe wine rack type, maybe there's some others. Just kind of where you are in that process. Justin Loweth: Yes, John, thanks for the question. So we think about it a lot. Right now, our base development plan, what we think about is to go with a lower Utica development first because it has a slightly better economic edge. That being said, we really want to challenge that thesis and that result. So what we're doing is literally here right now, we're going to begin flowback on a true co-development Upper, Lower Utica pad. We've got another one planned for later this year. And we're going to take that data and that information and really use it to assess the right development plan. And as I mentioned, our lean right now is towards go ahead and do the lowers initially and come back and do the uppers in time. But we don't want to just make that assumption. And so we're keeping our options open. We've got the ability to pivot to go one way or the other but we want to be led and informed by data and results. And so that's what we're in the process of doing, and we'll be doing so over the next kind of 12 to 18 months before making a conclusive decision. John Freeman: Got it. And then just kind of a bigger picture question. There's been a healthy amount of upstream sort of M&A by some of your peers over the last like 6 months. I'm curious if you all's M&A focus will remain on more of the regulated businesses or following CenterPoint closing, if we could see maybe a shift of M&A focus back toward whether it's upstream or just your unregulated businesses. David Bauer: Yes. John, I mean you're right. Going into CenterPoint, we were focused on the regulated side of the business, and we're able to do a great transaction. I'd still like us to be a bigger company. And I think the CenterPoint deal kind of rebalances the company a bit and it gives us the flexibility to look at transactions on both the regulated and nonregulated side of the business. I don't know that I'd say that I have a particular priority one way or the other, other than to invest capital in ways that get the best returns for our shareholders. Operator: The next question will be from the line of Jeff Bellman with Daniel Energy Partners. Jeff Bellman: I had 2 questions. First question, Justin, just on the frac barrier between the upper and the lower, how variable is that? Or is it not? And just kind of an assessment of how that frac barrier looks across your acreage? That's my first question. Justin Loweth: Yes. At a big picture level, what I would share with you is that this is a regionally unique feature that we have due to some series of or singular seismic event that happened several hundred million years ago. The thickness, we've got really good well control and understanding of the thickness of that seismic barrier across our acreage position. It does vary in the depth -- excuse me, in the size of it, but the overall characteristics of that largely impermeable barrier is consistent across our acreage from everything we've seen. So we think it's -- everything we've delineated in the uppers and you can see, and we've tried to provide a map in our latest IR deck, you can just get a sense of the areal extent of our testing. We feel like it's a very effective barrier across that position that we fully delineated. Jeff Bellman: Great. Second question, can you guys speak a little bit more broadly just in terms of -- you kind of touched on a little bit, just incremental takeaway industry-wide out of the basin. I hear some comments about kind of more gas that can move west out of Pennsylvania to Ohio, a lot of data center development there. Just broadly speaking, what's your sense on kind of brownfield takeaway out of the basin going west? And maybe if you have any view on volumes going south? Justin Loweth: Sure. Well, I'd say, I mean, for the first time in a while, there's actually projects that are kind of happening more, right? So there are -- within the basin, I would put it into a few categories. I mean the brownfield is happening. I mean that's this new capacity that Seneca has signed up for that will go in service in 2028 is a good example. The Tioga Pathway Project that supply -- National Fuel Gas Supply is building this year that will serve Seneca is another good example. So a combination of brownfield and quasi-greenfield kind of intra-basin or moving a bit out of basin but to more premium markets. That's great. I think the potential for really big greenfield pipe is still pretty challenged. We're really encouraged with the news out of both FERC and New York that seems to have greenlit NEE getting built. That's also a very important project for us specifically because we move a lot of our gas through our Atlantic Sunrise and Leidy South capacity. exactly into that market, and this will create a new significant pull on demand and should further support the pricing there. And then there is the in-basin demand. I mean there's been a number of significant power gen and/or power gen data center-related projects that have been announced and that are in various stages of construction. So that will keep growing the demand. So I think it's kind of all those things. And the last one I would put in there is that we think there's still a big opportunity, particularly for some of the very large interstate pipelines that have -- that move well out of the basin you can pick on different names, whether it's a Transco or Tennessee or others, where they likely have some real opportunities to further debottleneck their pipe by doing some minor modernizations or compression adds even beyond in the basin that could free up more gas to get out of Appalachia. And I think, as Dave said just a minute ago, what we need is more steel and more takeaway in order to help dampen some of this volatility. And so those are the very projects that could really help do that. And frankly, our position at Seneca and NFG Midstream is well interconnected to where that takeaway would start. So we're watching it closely. We're participating in it through the projects we're doing, and I'll call it, cautiously optimistic we'll see more of that. Operator: Thank you. This will conclude today's Q&A session. I will now hand the call back to Natalie Fischer for closing remarks. Natalie Fischer: Thank you, Harry. We'd like to thank everyone for taking the time to be with us today. A replay of this call will be available this afternoon on both our website and by telephone and will run through the close of business on Thursday, February 5. Please feel free to reach out if you have any follow-up questions. Otherwise, we look forward to speaking with you again next quarter. Thank you, and have a nice day. Operator: This concludes today's call. Thank you for joining the National Fuel Gas Company First Quarter Fiscal 2026 Earnings Call. You may now disconnect your lines.
Operator: Good afternoon, and thank you for joining the Fourth Quarter 2025 Earnings Conference Call for LPL Financial Holdings Inc. Joining the call today are Chief Executive Officer, Rich Steinmeier; and President and Chief Financial Officer, Matt Audette. Rich and Matt will offer introductory remarks, and then the call will be open for questions. [Operator Instructions] The company has posted its earnings press release and supplementary information on the Investor Relations section of the company's website, investor.lpl.com. Today's call will include forward-looking statements, including statements about LPL Financial's future financial and operating results, outlook, business strategies and plans as well as other opportunities and potential risks that management foresees. Such forward-looking statements reflect management's current estimates or beliefs and are subject to known and unknown risks and uncertainties that may cause actual results or the timing of events to differ materially from those expressed or implied in such forward-looking statements. For more information about such risks and uncertainties, the company refers listeners to the disclosures set forth under the caption Forward-Looking Statements in the earnings press release as well as the risk factors and other disclosures contained in the company's recent filings with the Securities and Exchange Commission. During the call, the company will also discuss certain non-GAAP financial measures. For a reconciliation of such non-GAAP financial measures to the comparable GAAP figures, please refer to the company's earnings release, which can be found at investor.lpl.com. With that, I'll turn the call over to Mr. Steinmeier. Richard Steinmeier: Thanks, operator, and thank you to everyone for joining our call. It's a pleasure to speak with you again. Before touching on our fourth quarter results, it was a milestone year for LPL as we significantly advanced our key strategic priorities. To reflect on a few of our key accomplishments, we delivered industry-leading organic asset growth of 8%, including the onboarding of the retail wealth management businesses of Wintrust Financial and First Horizon, which collectively support over 200 financial advisers managing roughly $34 billion in client assets. We completed the onboarding and integration of Atria Wealth Solutions, converting 7 distinct broker-dealers to the LPL platform. We signed and closed our acquisition of Commonwealth Financial Network, marking the largest deal in LPL history, welcoming their home office staff and approximately 3,000 advisers to the LPL family. We launched a national marketing campaign to elevate our brand with advisers and their clients. We significantly advanced our employee experience, resulting in our highest employee engagement scores in nearly a decade. We made meaningful progress driving improved operating leverage. And finally, our collective efforts resulted in record adjusted earnings per share of $20.09. Okay. Now let's turn to our Q4 results. In the quarter, total assets increased to a record $2.4 trillion, driven by organic growth and higher equity markets. We attracted organic net new assets of $23 billion, representing a 4% annualized growth rate. Our fourth quarter business results led to strong financial performance with record adjusted EPS of $5.23, an increase of 23% from a year ago. Next, let's turn to our strategic plan and progress across our organic and inorganic initiatives. Our vision is clear. We aspire to be the best firm in wealth management. To do that, we are focused on 3 key priorities: One, maintaining the client centricity the firm was built on; two, empowering our employees to deliver exceptionally for our advisers and their clients; and three, delivering improved operating leverage. Effectively executing on these focus areas will help us sustain our industry-leading growth while advancing the efficiency and effectiveness of our model. With that as context, let's review a few highlights of our business growth. In Q4, recruited assets were $14 billion, bringing our total for the year to $104 billion. Throughout the quarter, our pipelines continued to build and are near record levels. Recognizing that many opportunities are in the early and mid-stages, we expect the pull-through to improve over the course of the year as we reignite our industry-leading growth engine. In our traditional markets, we added approximately $13 billion in assets during Q4 as we maintained our industry-leading capture rates of advisers in motion. With respect to our expanded affiliation models, strategic wealth, independent employee and our enhanced RIA offering, we delivered another solid quarter, recruiting roughly $1 billion in assets. Turning to overall asset retention. It was 97% for Q4 and over the last 12 months. This is a testament to the continued efforts to enhance the adviser experience through the delivery of new capabilities and technology and the evolution of our service and operations functions. As for Commonwealth, we are thrilled to be working closely with our new colleagues to develop the target operating model and positioning for the Commonwealth value proposition within our suite of offerings. The work is well underway, and we remain on track to onboard the Commonwealth advisers in Q4. In parallel, in partnership with our Commonwealth colleagues, we remain focused on helping their advisers understand the benefits of staying with Commonwealth, ensuring each adviser has everything needed to complete their diligence and make an informed decision. We continue to expect roughly 90% retention of client assets. As we get closer to onboarding later this year, our estimate will continue to firm up. In closing, the fourth quarter was a capstone on an outstanding year. This is a result of the dedication of our team and their unwavering commitment to our advisers. So I want to thank everyone at LPL for their efforts. As we look ahead, we remain well positioned to serve as a critical partner to our advisers and institutions to continue delivering industry-leading organic growth and to maximize long-term value for shareholders. With that, I'll turn the call over to Matt. Matthew Audette: Thanks, Rich, and I'm glad to speak with everyone on today's call. As we reflect on 2025, it's been a year of meaningful progress for LPL as we continue to execute against some of our key strategic priorities, which include advancing our efforts to drive improved operating leverage through a combination of increased efficiency in our business and refinements to pricing to ensure it is aligned with the value we deliver and driving further improvements to the adviser experience by removing friction through investments in automation across our service, operations and supervision. As we look ahead, we're encouraged by the opportunities in front of us to better serve our advisers and continue strengthening our industry-leading value proposition. Now turning to a few highlights from our Q4 business results. Total advisory and brokerage assets were $2.4 trillion, up 2% from Q3 as continued organic growth was complemented by higher equity markets. Total organic net new assets were $23 billion, an approximately 4% annualized growth rate. For the full year, total organic net new assets were $147 billion or an approximately 8% growth rate. As for our Q4 financial results, the combination of organic growth and expense discipline led to adjusted pretax margin of approximately 36% and record adjusted EPS of $5.23. Gross profit was $1.542 billion, up $62 million sequentially. As for the key drivers, commission and advisory fees net of payout were $453 million, up $27 million from Q3. Our payout rate was 88%, up 53 basis points from Q3 due to the seasonal build in the production bonus. With respect to client cash revenue, it was $456 million, up $14 million from Q3 as the sequential growth in balances more than offset the impact of lower short-term interest rates. Overall client cash balances ended the quarter at $61 billion, up $5 billion sequentially, a strong outcome even when considering the typical Q4 seasonal build. Within our ICA portfolio, the mix of fixed rate balances ended the quarter at roughly 55%, within our target range of 50% to 75%. Looking more closely at our ICA yield, it was 341 basis points in Q4, down 10 basis points from Q3, driven by the impact of the October and December rate cuts. As we look ahead to Q1, we expect the full quarter impact of the Q4 rate cuts to lower our ICA yield by roughly 10 basis points. As for service and fee revenue, it was $181 million in Q4, up $6 million from Q3 as the full quarter of Commonwealth was partially offset by lower conference revenue and IRA fees. Looking ahead to Q1, we expect first quarter service and fee revenue to increase by approximately $25 million sequentially. This is driven by 2 factors: first, a seasonal decline in conference revenue of approximately $10 million. This is more than offset by the impact of the fee changes we announced last quarter, which will provide an ongoing quarterly benefit to service and fee revenue of roughly $35 million or $140 million annually. Moving on to Q4 transaction revenue. It was $75 million, up $8 million from Q3, driven by increased trading volumes. As we look ahead to Q1, trading activity levels remain roughly in line with Q4. However, I would note there are 3 fewer trading days in Q1, so we expect transaction revenue to decline by a few million sequentially. Now let's turn to our acquisition of Commonwealth. As Rich mentioned, the transaction is progressing well, and we remain on track to onboard in the fourth quarter. As for the financials, accounting for current client assets and cash balances as well as interest rates, we continue to estimate run rate EBITDA of approximately $425 million once fully integrated. Next, let's move on to expenses, starting with core G&A. It was $536 million in Q4, bringing our full year core G&A to $1.852 billion, below the low end of our outlook range, reflecting progress we've made driving greater efficiency and lowering our cost to serve. For the full year, prior to the impact of Prudential, Atria and Commonwealth, 2025 core G&A increased by approximately 4%, our lowest level of growth in several years. In 2026, we plan to continue to invest in the business to deliver greater efficiencies and drive operating leverage as we scale. Prior to Commonwealth, we expect core G&A growth of 4.5% to 7% or $1.775 billion to $1.820 billion. In addition, we'll have the full year impact of expenses related to Commonwealth, which adds roughly $380 million to $390 million. This brings our overall expectation for 2026 core G&A to be in a range of $2.155 billion to $2.210 billion. And to give you a sense of the near-term timing of the spend, as we look ahead to Q1, we expect core G&A to be in a range of $540 million to $560 million. Next, I want to highlight a minor update to our management P&L this quarter, where we separated TA loan amortization from promotional expense. While this is not a new disclosure, we hope the updated placement allows you to more easily analyze our results. So looking at TA loan amortization, it was $133 million in Q4, up $28 million sequentially, driven by Commonwealth-related transition assistance as well as our ongoing recruiting. As we look ahead to Q1, we expect TA loan amortization to increase by roughly $5 million, primarily driven by Commonwealth. Turning to promotional expense. It totaled $76 million in the fourth quarter, down $21 million sequentially, primarily driven by lower conference spend. Looking ahead to Q1, we expect promotional expense to be roughly flat sequentially. Turning to depreciation and amortization. It was $105 million in Q4, up $5 million sequentially. Looking ahead to Q1, we expect depreciation and amortization to increase by $5 million. As for interest expense, it was $106 million in Q4, roughly flat sequentially as increased usage of the revolver was offset by lower short-term interest rates. Regarding capital management, we ended Q4 with corporate cash of $470 million, down $99 million from Q3. As for our leverage ratio, it was 1.95x at the end of Q4, near the midpoint of our target range. Moving on to capital deployment. Our framework remains focused on allocating capital aligned with the returns we generate, investing in organic growth first and foremost, pursuing M&A where appropriate and returning excess capital to shareholders. In Q4, we continued to deploy capital in line with our priorities, investing primarily in organic growth and M&A, where we advanced the Commonwealth integration and continue to allocate capital to our Liquidity & Succession solution. Specific to share repurchases, a reminder that we paused buybacks following the announcement of the Commonwealth acquisition with a plan to revisit following the onboarding. As we look ahead, we are ahead of schedule with leverage already at the midpoint of our target range and the operational work to onboard Commonwealth well underway, there may be an opportunity to refine the timing of resuming share buybacks later this year. In closing, we delivered another quarter of strong business and financial results. As we look forward, we remain excited about the opportunities we have to continue to drive growth, deliver operating leverage and create long-term shareholder value. With that, operator, please open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Steven Chubak from Wolfe Research. Steven Chubak: Rich and Matt, thanks for taking my questions or one question. So I did want to ask on Commonwealth retention. There's been a fair amount of press coverage in recent weeks, suggesting the retention was running well below that 90% target. So certainly pleased to see the 90% target reaffirmed. I was hoping you could speak to what gives you confidence that you could still achieve that 90% asset retention figure. And just given the near record recruiting pipeline that you cited, just speak to some of the actions that you're planning on taking to get core recruiting ex Commonwealth back on track. Richard Steinmeier: I'll start or do you want to start? Matthew Audette: Yes, I'll start with the retention, Steven. I think when you look at retention, right, and it's based on assets, right? The assets we expect to land on our platform after the onboarding in Q4. And that's our methodology. We consistently do that on our acquisitions. So I think when you and others that are speaking here that are reading headlines about headcount departures, just to give you a little color on that, when you look at the advisers who have signed to stay with LPL so far, we're now just over 80%. And you look at those, on average, they are larger, they are faster growing, and they are higher producers than those that have decided to go elsewhere. So I think when you get some noise when you look at those headcount departures. But when you look at the advisers that have committed to stay with LPL, with Commonwealth, it is an impressive group, and we are really excited to welcome them on the platform as we onboard in the fourth quarter. Richard Steinmeier: So maybe just to augment that just briefly, as Matt, I think, made it very clear on the asset retention and that we're retaining the larger advisers. I think there are still advisers who are making their decisions over the course of the balance of the next couple of months and maybe even through the next couple of quarters. And we are deeply connected between Commonwealth and LPL to help educate them on the continuing of value proposition of Commonwealth. And we are very confident that by keeping the community intact, safeguarding their experience, their culture, their capabilities and their leadership, that will ultimately win the day. And quite honestly, those are the conversations that we're having as folks have gone through a very elongated due diligence process, they're coming back to having much more productive conversations now than we were even having at the beginning. And so maybe parting shot on that, Steven. Overall, we are thrilled with this transaction. We love the way the teams are coming together. We are excited about the prospects for our go-to-market strategy and the integrated firm. Now you mentioned -- and maybe one last thing, I will mention that, as Matt said, last quarter, we updated you that we had advisers representing nearly 80% of assets have signed their agreements to stay with Commonwealth. And as of today, that has improved to the low 80% range of advisers representing low 80% range of assets have signed agreements to stay with Commonwealth. As for achieving -- getting back on track in recruiting, I think it needs to be noted that many of our top recruiters have been focused on Commonwealth retention efforts. And as we approach the conversion, with more Commonwealth advisers completing their diligence signed, our recruiters are getting back to their organic recruiting efforts. So looking ahead, we should gradually return to more normalized recruiting outcomes driven by increased in -- increased win rates in traditional markets with our unmatched value proposition, further penetrating the wire and regional employee adviser space where there is growing awareness of our solution, and we continue to narrow the gap on capabilities. And of note there, over the last couple of years, we have grown our capture of wirehouse and regional employee advisers from 9% of all advisers in motion to now up above 11% of all advisers in motion. And augmenting that, our Liquidity & Succession solutions create an important part of the value proposition for new advisers to join, so they'll have an option when they're ready to transition their business. If you couple that with low attrition and steady contribution from same-store sales, it sets us up really well to sustain mid- to high single-digit growth over the long term. Operator: And our next question comes from the line of Alexander Blostein from Goldman Sachs. Alexander Blostein: Maybe building on that a little bit, Matt, I heard you reaffirm your EBITDA contribution of $425 million once everything is onboarded. Maybe help unpack that a little bit because given just the assets have grown due to market largely and you're still on track to $90 million, and you highlighted you're running, I guess, in the low $80s million now. Why isn't the $425 million higher? Are there other puts and takes we need to consider? Or you guys are just looking to revisit that once the -- once the assets are fully onboarded? I just want to kind of better understand the mark-to-market impact on all of that. Matthew Audette: Yes. There's just -- yes, you've got assets have gone up a bit, Alex, but you've also got another interest rate cut. And when you look at the cash sweep bet at Commonwealth that built up in December, that's already gone back into the marketplace. So those things kind of net offset each other, and that's why we're still at roughly $425 million. Operator: And our next question comes from the line of Dan Fannon from Jefferies. Daniel Fannon: So I wanted to follow up just on the growth outlook. And Rich, you had mentioned reigniting the growth engine at LPL. So is it just time and the timing of this in terms of getting back to regular recruiting? Or can you talk to the industry dynamics and advisers in motion and kind of the recruiting backlog today versus where it maybe was a year ago? And just kind of thinking more about the acceleration, whether that could be more of a first half dynamic or you think it's really closer towards that onboarding of the Commonwealth assets? Richard Steinmeier: Yes. I appreciate it, Dan. There's a lot in there. So maybe let's start with the recruiting environment first. I will tell you, we pay very close attention to the advisers in motion. And relative to historic norms, we still see that adviser movement remains tempered relative to historic levels. Now look, truth there is that there are events in the marketplace that can drive that churn to higher levels. And that one right now is probably the acquisition of Commonwealth. And so we're participating there, obviously, dedicating recruiters. A recruiting event where you're trying to educate 3,000 advisers is a very large event for us. And so we dedicated and ring-fenced a set of our most sophisticated and most senior recruiters and working against that. And as I alluded to and as you referenced, as we get more signs and you mentioned where we're at, those recruiters get the chance to pivot back to their organic recruiting pipeline. But as I noted earlier, when you start building those pipelines, you're going to build into the earlier stages as you think about a stage progression pipeline. And so while our pipelines continue to build through Q4 and they are near record levels, they're loaded towards that early and mid-stages. And so that takes time, and we've alluded to on calls in the past, you get different durations of how long a cycle time is for a recruiting event, and they vary from independent adviser 1099 direct to our supported models in strategic wealth and Linsco have longer lead times. And so when that will pull through is a function of the mix of those advisers and how they get through their diligence and decision-making. But we expect that pull-through to continue to improve over the course of the year. And maybe if we think about the environment that we're in, I think you've heard it on some of the other calls as well, it's a competitive environment right now. Competitors remain aggressive. We've seen TA levels spike up, most notably right after the Commonwealth announcement. And we see those TA levels staying elevated in the marketplace. And so typically, in the wake of several interest cuts, we would have expected some moderation in TA, and that really hasn't happened. Rates have remained high in absolute terms. And so from our perspective, nothing about our approach has changed. We stayed disciplined on returns with TA being a part of the conversation but really not the driver of decisions. And as a reminder, advisers in motion's priorities continue to be: One, capabilities, technology, service, culture; two, ongoing economics; and then third, upfront economics. So as you put that all together, I think as recruiting activity normalizes, we'd expect organic growth to pick up as those pipelines convert, positioning us to reignite and sustain industry-leading organic growth over time. Operator: And our next question comes from the line of Craig Siegenthaler from Bank of America. Craig Siegenthaler: My question is on footnote 15 from the historical file. You disclosed purchase money market funds there, and it looks like they might be finally at a ceiling. So I'm wondering, do you expect liquidity to start to run there with a few more Fed cuts? And where does that go? Is there an opportunity to generate more ROA on that, maybe in alts, insurance and probably eventually back in the cash sweep? Matthew Audette: Kudos, Craig, on the detailed historical file there. Richard Steinmeier: I thought he would have called on historical footnote 14, 15. Matthew Audette: Yes. We'll cover that. We'll cover that. But I think -- yes, there you go. I think -- so what you're hitting on is the kind of the cash equivalents and how much money they're in either purchase money markets or short-term bond funds and treasuries. And I think we saw those build throughout this cycle. Those balances collectively are in excess, so purchase money market plus those other categories, treasuries, short-term bond funds in excess of cash sweep balances overall. And I think as the rate environment comes down, as you see those things advisers get their clients back into the marketplace. I think it's very natural that those are the types of funds that will go back into play. So there's more than just purchase money markets in that category, but I think it gives you a good sentiment on where advisers are putting their clients as cash yields come down and the equity markets and other opportunities even on the brokerage side, like annuities and things are opportunistic. So I think that's what you see driving the movements there. Operator: And our next question comes from the line of Michael Cho from JPMorgan. Y. Cho: I just want to touch on Commonwealth as well, just more from an, I guess, an integration perspective. I mean you closed the deal maybe 4 or 5 months ago. I was just wondering, can you just talk through the progress of the integration and preparing for the onboarding ahead? Any key takeaways you'd highlight or anything that might influence priorities for the broader LTL organization looking ahead? Richard Steinmeier: Thanks, Michael. It's good to have you. So integration is going really well. And I would note here, one of the things that over the last 5 to 7 years, we have done a lot is major integration events. If you think through M&T, BMO, TruStage, Waddell & Reed, Atria. There is a number of large events that we have gone through and Prudential that have critical builds across in many of those instances, above $100 million in dev, sometimes above $200 million in dev. And so as we look into Commonwealth, we have scoped -- before we went into this transaction, we had scoped all of the capabilities that we needed to build that would benefit not only Commonwealth advisers as they come on to the platform, but all of our advisers and institutions. The scoping of that work is completed. We have our model build. We've begun dev already. And some of the complexity of the dev there is what actually drove an elongated time frame for the conversion. We're feeling really good about our ability to deliver against that capability development and for our advisers to experience it. And I think we've referenced some of this before but Commonwealth is exceptional in the delivery of their service experience. And some of that is -- a large part of that is informed by the way they receive feedback. That is a difference from the way our construction of our workstation was set up. And so we're building an incredibly robust feedback ingestion engine that allows us to actually get feedback from advisers, prioritize that, disposition it to folks to work on that, and then execute against that, making it a frictionless environment kind of one day at a time. One of the other things they have is a fantastic single relationship agreement across multiple account structures that we've had to go through a pretty significant build, and we're in the middle of that build to build that, which will be benefited by all of our advisers. And so there is a list, and that includes householding, repricing -- restructuring the pricing construct of some of our advisory platforms as well. So we have a good understanding of the build that's there. We have a great understanding of the capabilities that will be delivered. And now part of that is now moving into the definition of that target state operating model, which I alluded to earlier, we are in the middle of the articulation of that target state operating model, working deeply with Wayne Bloom and his team to make sure that we are keeping Commonwealth commonwealth, that we are keeping the folks who serve the Commonwealth advisers the same people and giving them the tools and capabilities to deliver the exceptional service that has resulted in 12 consecutive J.D. Power Awards for independent adviser satisfaction, a record in the industry. Thought is that we build those capabilities so that they can keep going to #13 and #14 and 15. And while they do that, we increase our ability to serve with distinction just like Commonwealth does today. So all of that taken together, we feel really good about our understanding of what needs to be done. We feel good about our ability to execute and deliver, and we feel great about the combined value proposition that will result from the 2 firms. Operator: And our next question comes from the line of Ben Budish from Barclays. Benjamin Budish: I think earlier in the Q&A, Rich, you were talking about an increased win rate of advisers in motion coming from the wires. Just curious if you could unpack a little bit more what's going on there. It seems like some of the -- both the media coverage and commentary from some of the bigger banks is that they're looking to get more aggressive, whether it's on recruiting TA packages, whatever it may be. So what do you attribute to sort of the recent success? How important do you see some of the pieces that are being built out, securities-backed lending and the alts platform, things like that, that are expected to be in place by the end of the year is improving that position? And again, you talked about competition broadly, but how would you describe the state of competition with that group of competitors specifically? Richard Steinmeier: Yes. Thanks, Ben. So if we go back, what underpins that movement of us improving our capture rates in that wire and regional employee channel. The first is that on balance, you've got a macro tailwind there for you. We have seen a crossover that as advisers move out of wires and W-2 channels more broadly, historically, had been that they move from W-2 channel to -- one W-2 firm to another W-2 firm. What you have seen is increasingly year in and year out, the percentage of advisers that are in a W-2 channel when they're making a move that has crossed the threshold of more than 50% of advisers that are in W-2 channels making a move actually move to an independent construct. For us, we are the leading player for folks who want to run their own independent business because we have multiple affiliation models. The second stage in our journey was that we introduced affiliation models several years ago that made it more attractive for folks who are in a W-2 construct to move to independents with support on their side. So that was the theory to the case in the construction of our strategic wealth offering that helps 1099 advisers set up, move and have a support mechanism around them with incredible support as well as our W-2 channel introduction Linsco. Now beyond that, what we had was, and we referenced this kind of pretty consistently in the quarters, is we still had some capability gaps relative to product set, lending and some high net worth capabilities. And we are steadily knocking those down one at a time, and our consideration rate continues to go up. So what we find is that advisers are increasingly willing to get into conversations with us. And they may be getting there because of the Linsco channel, they may be getting there because of Strategic Wealth. And ultimately, they'll land across the gamut of either establishing their own RIA, which we support in our own independent employee W-2 channel and a supported independence channel or in a direct 1099 affiliation on our corporate RIA. So we have more affiliation landing spots than any other firm. And maybe lastly, to leg into that, we have added a national brand campaign that highlights and makes more clear to end investors, and we've seen an improvement of aided and unaided brand awareness, both of our firm for both end investors as well as advisers. Lastly, Commonwealth is a very validating event to our position in the marketplace. They are a premium brand. They have premium capabilities, and they have the best advisers in the industry. The leadership of that firm chose us as the best firm to support those advisers, and that made more W-2 advisers stand up and take notice of this firm as a leading firm in wealth management. Operator: And our next question comes from the line of Brennan Hawken from BMO Capital Markets. Brennan Hawken: I had sort of a 2-parter here. So I know that Commonwealth is in focus. You've got -- you spoke to allocating your best recruiters to task. And of course, it takes time for net new asset pipelines to rebuild. So how long do you think it would take to start to see regular way net new assets revert to the rates that are more in line with your strong track record of growth? And then do you think it's possible we could get maybe a mark-to-market on how net new assets are progressing here to start out the year and maybe an update on cash balances. Matthew Audette: Yes. I'll start -- Brennan, I'll start with how January has gone so far. When you look at -- maybe start with organic growth. And I think as I mentioned in the prepared remarks, and I think you know well, January is usually one of the slowest months of organic growth for the year for 2 factors or 2 reasons. The year-end slowdown that you see in December -- second half of December, there's really no recruiting that could come on board. And then it takes a couple of weeks into January to ramp up both recruiting, same-store, et cetera. So January is usually pretty low. And then you get -- as you move into February and March, it builds. And then you also have advisory fees that hit primarily in the first month of the quarter. And as we're getting bigger and bigger on the advisory side, 58%, 59-ish percent advisory now, that's a bigger number that hits in the first quarter. You put all that together, and we're around 2.5% organic growth in January, again, with the expectation that then February and March builds. On the cash sweep side, I'd say there's a couple of days remaining, but I'd give you the headline that January is shaping up a bit better than you would typically see. You do have that same seasonal on advisory fees, which are around $2.5 billion. So that comes out of cash directly during the month. But outside of that, the Q4 buildup that we saw largely in December largely remains. So cash balances beyond fees are down roughly $1 billion. So you put all that together and balances are down around $3.5 billion, which would put overall cash sweep at roughly $57.5 billion. And just to give context, if you look at that Q4 build that largely happened or almost entirely happened in December, we're sitting right now $3 billion above November levels. So hopefully, that gives you a sense as to kind of how sticky the cash has been this year as opposed to prior years. Maybe, Rich, I'll give it back to you on the timing of organic growth question. Richard Steinmeier: Yes. So I think, Brennan, the way to think about this is, as we alluded to, we sit in the low 80s in terms of AUM assets that are committed to join. And that's not a complete proxy, as Matt had alluded to, for the actual number of advisers based on the fact that we have larger advisers joining. But what you'd see there is as we started in April, we had a real shift of our recruiters into that event. And we are now moving towards the tail end of that event. The issue that you have at hand is that the lead times for recruiting for an independent adviser going from one firm to the next usually sit between 3 to 6 months. And so once you enter pipeline, you can think about that as the time frame for most center of gravity decisions to make to move from firm to firm. But as you get into larger advisers, especially as they're considering supported models like Linsco, if they're establishing their own RIA as well or our strategic wealth, you're oftentimes with those larger teams looking at pipeline decision-making to conversion that sits center of gravity between 6 months to a year. So it really does depend on the mix makeup of what we have in pipeline. As we alluded, we've seen really nice pipeline build, especially into the first couple of stages of our pipeline. And what it takes is a little bit of time, especially with those seasoned recruiters to progress those through the pipeline. So as we alluded to, it's going to occur during the course of this year, and I'm probably giving an answer that is more precise than that at this moment in time, I probably can't do that. Operator: And our next question comes from the line of Devin Ryan from Citizens Bank. Devin Ryan: I want to shift to the enterprise channel and Prudential specifically now that we're a little bit over a year past that integration. And just would love to dig in a little bit more around some of the learnings. I'm sure you have a lot more data today on how that's going. So it would just be great if you could give any proof points to us on how it's going? What type of acceleration in growth are you are they seeing? And then just how it sets you up for maybe more in the insurance channel. I'm curious if you're seeing interest from other parties as these maybe positive anecdotes start to make their way to the market. Richard Steinmeier: Thanks, Devin. So just as a reminder, we brought on Pru 2024 in November, where they added about $67 billion in assets. And we knew as we were in discussions, Pru has a fantastic wealth franchise, and they were always bullish on their outlook for the wealth management business, and they were looking for ways to further advance the business. We got into that partnership, and we had quite a bit of build to build in terms of the capability sets. And as we built those capability sets, it positions us well to be able to work with other insurance firms and/or product manufacturers. But I actually do have the ability to be a little bit outspoken here, mostly because we would never break news for our partners. But in the fourth quarter, Prudential announced that their adviser headcount growth had accelerated 9% year-to-date, and they had roughly $3 billion in NNA. And that was in the fourth quarter and not the completion of the fourth quarter. And I can tell you, I was with them over the holidays. They are incredibly bullish on their franchise. They have a fantastic sales infrastructure. Their leadership structure is very strong. They develop new advisers really well and their backlog of other insurance-based advisers looking at Prudential continues to grow. We have had really great results as we partner with them in recruiting to their franchise. In terms of our pipeline, I think this is where you get -- I mentioned this a couple of times before, a signature event and a signature partnership, I would call this very akin to our M&T Bank, where M&T plowed and took a leap of faith with us to plow into new territory of a larger bank wealth outsourcing that really moved from why are you doing that to why aren't you doing that? And I think those are the discussions we're beginning to get into. But I think there just needs to be a recognition. We have a recognition that other firms, there's some trepidation to get into those conversations because Prudential really broke the mold in how they partnered with us. I think I can speak pretty clearly for them when we both are incredibly happy about the results and think that their franchise is very strong and positions them incredibly externally. I'm so proud of being able to be a partner of Pru. And we're looking forward to having further conversations with -- I think a number of firms have begun exploratory conversations but more progressed conversations. Operator: And our next question comes from the line of Bill Katz from TD Cowen. William Katz: And happy anniversary since no one else has said that. Just a couple of maybe interconnected questions. Matt, you alluded to possibility of accelerating the sort of capital deployment that you're running a little bit ahead in terms of operationally and your leverage ratios. Can you give us a sense of what mileposts we should be looking at to potentially think about maybe starting to reincorporate capital return? And then just on the interest rate management side of the equation, you're sort of running at the lower end of your fixed to float. How are you thinking about that shape as you look into the new year given the forward curves are relatively stable from here? Matthew Audette: Yes. What anniversary, Bill? Richard Steinmeier: I know what he's talking about. So first off, he's super generous. Like that's a very thoughtful person. We always knew that about Bill but I appreciate it, Bill. He's -- he thinks that this is 1-year anniversary of my first earnings call, I think but it was actually Q3, a couple of weeks after. Matthew Audette: Was that it, Bill? William Katz: It was. Matthew Audette: Look at you. Super thoughtful. Richard Steinmeier: My anniversary was in August. So my wife would... Matthew Audette: Well, very good, Bill. All right. So on your 2-part question. So I think on share repurchases, I think in -- just to level set on our expectations initially when we announced the acquisition of Commonwealth, it was about making sure that we got our leverage down -- back down to 2x. And at that point, we would revisit capital returns. And given the timing of Commonwealth onboarding in Q4 that implied we'd look at it in Q4. And I think as we've talked about today, being ahead of plans on the deleveraging side, which is good. And the Commonwealth onboarding, while the time line hasn't changed, the prep is going well. I think I would take this as we're looking at whether we can start those share repurchases earlier. I would range that and say maybe a quarter earlier is what we're thinking. But I would just underscore, we've still got some work to do to really refine that. And we'll give an update in a future quarter. But I think just given where leverage is, I wanted to at least give an indication as to where our thinking was. With respect to the second part of your question on fixed rate sweep, no change in plan and approach there. It really is about that year-end build that you see in Q4. That's really what drove that down. As the stability of those cash balances really lands in this quarter and as I talked about for January so far, it's being a little bit stickier than it has in prior years, then we'll kind of move into the fixed rate market, typically landing in that low to mid-60% where we typically are. So that would be the plans for Q1. That being in that 55% zone or mid- to upper 50% zone was really about just the year-end buildup in December. Operator: And our next question comes from the line of Michael Cyprys from Morgan Stanley. Michael Cyprys: Just wanted to ask around core G&A. I think that your guide implies underlying core G&A growth of 4.5% to 7%, which is a bit of an acceleration from the underlying 4% you put up in '25. So I was just hoping you could elaborate on what's driving that acceleration into '26. Maybe speak to some of the areas you're investing in across '26 here. And maybe if you could also just update us on some of the initiatives that you have across expanding technology capabilities, broadening out the platform for advisers. Just what are your priorities here in '26 around that? Matthew Audette: Yes, you bet. I mean I think just to build a little bit of context on -- or reflect a little bit on 2025 because our initial outlook for 2025 was 6% to 8%. And even that range would -- if you look back at the last 4, 5 years, would have been the lowest growth rate. And to the premise or the point of your question, we ended up landing much lower than that at 4%, which has that next year's guide, 4.5% to 7% be a little bit of an increase. But I'd underscore that, that is about what we're able to deliver in 2025. That is the lowest growth rate in quite some time. And it really was driven by the cost efficiency work that we were able to deploy and things that are recurring savings and structural improvements to how we operate. And I think getting to your question on 2026 and that 4.5% to 7%, I think we're focused on doing a lot of the same but I would say balancing making sure we're continuing to drive investments or make investments that really improve our offering and drive growth and at the same time, continuing to make additional investments that can really drive efficiency and scale in the business. I think we are in the early stages of the opportunity set we have to make investments that not only allow us to scale better but also improve the client experience. And I think what you see in that range, even if you look at the midpoint of the range, that still would be one of our lowest growth rates in quite some time. And I think what it reflects is the opportunities that we have to really drive that growth. And I think even when you look at the range, it is a little bit wider than we typically do, 4.5% to 7%, so 2.5 points versus 2. And that's also just reflective of the number of initiatives that we have from an automation standpoint, from an AI standpoint and the precision with which you can predict when those hit, right? Those things could shift out something that's going to come in Q2, maybe it comes in Q3. That could impact the current year a little bit. But I would just underscore our confidence from a run rate standpoint of the opportunity set we have in front of us to continue to drive efficiencies that improve the bottom line, but also improve our client experience. It's a long list. We're excited about it. And I think that's what you see reflected in that guide. Operator: And our next question comes from the line of Jeff Schmitt from William Blair. Jeffrey Schmitt: For the Liquidity & Succession solution, and I think you spent a little over $50 million in the quarter. How do the returns on that look compared to traditional M&A and recruiting? I mean, are the multiples a lot lower in M&A? I know recruiting, you've kind of pointed to that being maybe 3, maybe 4x in this environment. So where does that sort of shake out? Matthew Audette: Yes. Jeff, on L&S, like from our target M&A range that we typically operate in is that 6 to 8x. And L&S operates right in that range. But I think a couple of things that I think are a little bit different. When you think about L&S, not only the quality of earnings, right, the economics that you're acquiring for 6 to 8x in L&S is 100% recurring noncash sweep earnings. So there's a higher quality there. And then I think the strategic benefits of just really when you think about the life cycle of something that goes through L&S from acquiring it to helping transition to the next generation, helping them get to a place where they've grown and earn back the ability to buy back that practice, and during that entire time, working with them in our Linsco model to really position them to really use us as a leverage point on nearly everything except for focusing on their clients and being able to grow them. When you just think about the practice in any L&S opportunity, the practice we acquired versus once it is now fully in the hands of the next generation, they're set up to be more efficient, faster growing and a higher-quality adviser practice as well. So there's a lot of benefits that just go beyond the pure economics. But to underscore the economics, it's the same range, 6 to 8x but it's a higher quality earnings because there's -- that's 100% noncash sweep economics that you're acquiring. Operator: And our next question comes from the line of Wilma Burdis from Raymond James. Wilma Jackson Burdis: Do you think there's some level of short-term interest rates where we'll start to see more cash build? And if so, are we starting to approach that level? And maybe you could just talk a little bit about the rate cuts in 4Q '25 and how that may or may not have contributed to build in the quarter. Matthew Audette: Yes. I think when you look at cash balances, and I think we have been -- when you think about the operational nature of them, and we're just looking at the fourth quarter in that build that you typically see and you saw in December, kind of putting those dynamics aside, like when you look at the average balances per account, they've been quite stable for quite some time and rounding to about $5,000, which I think when you think about the cash necessary to manage an account, we've really reached those levels. And I think that's why you saw that bigger than typical build in the month of December. So to get to your point, I think when we look ahead, as rates come down and kind of where do we think cash sweep is going, I think there is a bias to being stable to up just given it's at the levels that are really necessary to manage the account. We've seen that stability for a few quarters. Last couple of quarters, that average balance per account has actually grown. So I think that's the dynamic there. The individual rate cut or 2 in the quarter, Wil, I don't think that typically would really drive that. I think what moved cash balances in the quarter is that seasonal build for rebalancing and tasks, loss harvesting and things like that. Operator: Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Rich Steinmeier for any further remarks. Richard Steinmeier: Thank you all for joining us. We look forward to speaking with you again in April. Have a good night. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.